UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Overview
On October 3, 2017, Brocade Communications Systems, Inc. (“Brocade” or the “Company”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Extreme Networks, Inc., a Delaware corporation (“Extreme Networks”), to divest its data center switching, routing and analytics business (the “SRA Business”) to Extreme Networks (the “SRA Sale”). On October 27, 2017, the Company and Extreme Networks completed the SRA Sale.
Pursuant to the terms of the Purchase Agreement, upon the closing of the SRA Sale, Extreme Networks acquired certain assets associated with the SRA Business, assumed certain contracts and liabilities of the SRA Business, and hired certain Brocade employees associated with the SRA Business. In addition, upon the closing of the SRA Sale, Extreme Networks paid to the Company an upfront closing cash payment equal to $23 million (inclusive of $13 million representing target working capital, which is subject to a post-closing true-up adjustment based on the finally determined amount of working capital). Further, under the Purchase Agreement, Extreme Networks has also agreed to pay to the Company: (i) a deferred payment equal to $20 million to be paid in installments of $1 million per quarter for the first 20 full fiscal quarters of Extreme Networks following the closing of the SRA Sale, plus (ii) quarterly earnout payments equal to 50% of the profits of the SRA Business for the five-year period commencing at the end of the first full fiscal quarter of Extreme Networks following the closing of the SRA Sale. Pursuant to certain ancillary agreements, Brocade also agreed to provide Extreme Networks with access to certain technology related to the SRA Business, as well as transition services for a period of time following the closing of the SRA Sale.
Basis of Preparation
The following unaudited pro forma condensed consolidated financial statements were derived from the historical consolidated financial statements of Brocade, which were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The unaudited pro forma condensed consolidated statements of operations for the fiscal nine months ended July 29, 2017 and for each of the fiscal years ended October 29, 2016, October 31, 2015, and November 1, 2014, are presented as if the SRA Sale had occurred on October 27, 2013. The unaudited pro forma condensed consolidated balance sheet as of July 29, 2017 is presented as if the SRA Sale had occurred on July 29, 2017.
The “SRA Sale” column in the unaudited pro forma condensed consolidated financial statements also reflects pro forma adjustments which are described in the accompanying notes. The pro forma condensed consolidated financial statements do not reflect any expected cost savings, operating efficiencies or other synergies that may result from the SRA Sale. Any nonrecurring items directly attributable to the SRA Sale are adjusted in the unaudited pro forma condensed consolidated balance sheet but not adjusted in the unaudited pro forma condensed consolidated statements of operations.
The unaudited pro forma condensed consolidated financial statements reflect pro forma adjustments that are based on preliminary estimates and assumptions and other information available at the time of preparation. The Company believes that all such adjustments are (i) directly attributable to the SRA Sale, (ii) factually supportable, and (iii) expected to have a continuing impact on the Company’s future consolidated results of operations or financial condition. The unaudited pro forma condensed consolidated financial statements have been presented for illustrative and informational purposes only and are not intended to reflect or be indicative of Brocade’s results of operations or financial position had the SRA Sale occurred as of the dates presented, and should not be taken as representative of Brocade’s future consolidated results of operations or financial condition.
The Company believes that the adjustments included within the “SRA Sale” column of the unaudited pro forma condensed consolidated financial statements are consistent with the guidance for presenting discontinued operations under GAAP. The estimates underlying these assumptions are preliminary and could change as the Company has not finished preparing its consolidated financial statements to be included in its Annual Report on Form 10-K for the fiscal year ending October 28, 2017.
The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements of Brocade, the accompanying notes to those financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 29, 2016 and Quarterly Report on Form 10-Q for the fiscal nine months ended July 29, 2017.
BROCADE COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Fiscal Nine Months Ended July 29, 2017
(Amounts in thousands, except per share data)
| Historical Brocade (as reported) |
SRA Sale (a) |
Notes | Pro Forma | |||||||||||
| Net revenues: |
||||||||||||||
| Product |
$ | 1,385,273 | $ | (129,745 | ) | $ | 1,255,528 | |||||||
| Service |
298,209 | (62,934 | ) | 235,275 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total net revenues |
1,683,482 | (192,679 | ) | 1,490,803 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Cost of revenues: |
||||||||||||||
| Product |
486,153 | (80,457 | ) | 405,696 | ||||||||||
| Service |
136,301 | (24,479 | ) | 111,822 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total cost of revenues |
622,454 | (104,936 | ) | 517,518 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Gross margin |
1,061,028 | (87,743 | ) | 973,285 | ||||||||||
| Operating expenses: |
||||||||||||||
| Research and development |
360,164 | (103,162 | ) | 257,002 | ||||||||||
| Sales and marketing |
506,228 | (79,982 | ) | 426,246 | ||||||||||
| General and administrative |
92,127 | (2,733 | ) | 89,394 | ||||||||||
| Settlement with dissenting stockholder of Ruckus Wireless, Inc. |
8,528 | — | 8,528 | |||||||||||
| Amortization of intangible assets |
20,998 | — | 20,998 | |||||||||||
| Acquisition, divestiture, and integration costs |
49,519 | — | 49,519 | |||||||||||
| Restructuring charges |
17,801 | — | 17,801 | |||||||||||
| Impairment of equity investments |
2,870 | — | 2,870 | |||||||||||
| Loss on sold and held for sale software product lines |
24,315 | — | 24,315 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
1,082,550 | (185,877 | ) | 896,673 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| (Loss) income from operations |
(21,522 | ) | 98,134 | 76,612 | ||||||||||
| Interest expense |
(47,317 | ) | — | (47,317 | ) | |||||||||
| Interest and other income, net |
5,136 | — | 5,136 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| (Loss) income before income tax |
(63,703 | ) | 98,134 | 34,431 | ||||||||||
| Income tax (benefit) expense |
(27,275 | ) | 22,619 | (b) | (4,656 | ) | ||||||||
|
|
|
|
|
|
|
|||||||||
| Net (loss) income |
(36,428 | ) | 75,515 | 39,087 | ||||||||||
| Less: Net loss attributable to noncontrolling interest |
(274 | ) | — | (274 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||
| Net (loss) income attributable to Brocade Communications Systems, Inc. |
$ | (36,154 | ) | $ | 75,515 | $ | 39,361 | |||||||
|
|
|
|
|
|
|
|||||||||
| Net (loss) income per share—basic attributable to Brocade Communications Systems, Inc. stockholders |
$ | (0.09 | ) | $ | 0.10 | |||||||||
|
|
|
|
|
|
|
|||||||||
| Net (loss) income per share—diluted attributable to Brocade Communications Systems, Inc. stockholders |
$ | (0.09 | ) | $ | 0.09 | |||||||||
|
|
|
|
|
|
|
|||||||||
| Shares used in per share calculation—basic |
408,494 | — | (c) | 408,494 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Shares used in per share calculation—diluted |
408,494 | 10,458 | (c) | 418,952 | ||||||||||
|
|
|
|
|
|
|
|||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements.
BROCADE COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Fiscal Year Ended October 29, 2016
(Amounts in thousands, except per share data)
| Historical Brocade (as reported) |
SRA Sale (a) |
Notes | Pro Forma | |||||||||||||
| Net revenues: |
||||||||||||||||
| Product |
$ | 1,959,596 | $ | (279,172 | ) | $ | 1,680,424 | |||||||||
| Service |
386,014 | (86,920 | ) | 299,094 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total net revenues |
2,345,610 | (366,092 | ) | 1,979,518 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cost of revenues: |
||||||||||||||||
| Product |
657,161 | (139,145 | ) | 518,016 | ||||||||||||
| Service |
172,110 | (28,694 | ) | 143,416 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total cost of revenues |
829,271 | (167,839 | ) | 661,432 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Gross margin |
1,516,339 | (198,253 | ) | 1,318,086 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
413,236 | (145,968 | ) | 267,268 | ||||||||||||
| Sales and marketing |
641,403 | (178,987 | ) | 462,416 | ||||||||||||
| General and administrative |
110,627 | (3,373 | ) | 107,254 | ||||||||||||
| Amortization of intangible assets |
15,661 | — | 15,661 | |||||||||||||
| Acquisition and integration costs |
28,922 | — | 28,922 | |||||||||||||
| Restructuring, goodwill impairment, and other related benefits |
(603 | ) | — | (603 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total operating expenses |
1,209,246 | (328,328 | ) | 880,918 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from operations |
307,093 | 130,075 | 437,168 | |||||||||||||
| Interest income |
5,251 | — | 5,251 | |||||||||||||
| Other loss, net |
(979 | ) | — | (979 | ) | |||||||||||
| Interest expense |
(49,327 | ) | — | (49,327 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income before income tax |
262,038 | 130,075 | 392,113 | |||||||||||||
| Income tax expense |
48,111 | 27,365 | (b) | 75,476 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
213,927 | 102,710 | 316,637 | |||||||||||||
| Less: Net income attributable to noncontrolling interest |
(112 | ) | — | (112 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income attributable to Brocade Communications Systems, Inc. |
$ | 213,815 | $ | 102,710 | $ | 316,525 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income per share—basic attributable to Brocade Communications Systems, Inc. stockholders |
$ | 0.52 | $ | 0.77 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income per share—diluted attributable to Brocade Communications Systems, Inc. stockholders |
$ | 0.51 | $ | 0.76 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Shares used in per share calculation—basic |
409,058 | 409,058 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Shares used in per share calculation—diluted |
417,093 | 417,093 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements.
BROCADE COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Fiscal Year Ended October 31, 2015
(Amounts in thousands, except per share data)
| Historical Brocade (as reported) |
SRA Sale (a) |
Notes | Pro Forma | |||||||||||||
| Net revenues: |
||||||||||||||||
| Product |
$ | 1,902,401 | $ | (333,727 | ) | $ | 1,568,674 | |||||||||
| Service |
361,059 | (80,435 | ) | 280,624 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total net revenues |
2,263,460 | (414,162 | ) | 1,849,298 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cost of revenues: |
||||||||||||||||
| Product |
587,515 | (160,601 | ) | 426,914 | ||||||||||||
| Service |
147,872 | (25,148 | ) | 122,724 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total cost of revenues |
735,387 | (185,749 | ) | 549,638 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Gross margin |
1,528,073 | (228,413 | ) | 1,299,660 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
356,720 | (148,433 | ) | 208,287 | ||||||||||||
| Sales and marketing |
585,230 | (193,758 | ) | 391,472 | ||||||||||||
| General and administrative |
87,623 | (4,262 | ) | 83,361 | ||||||||||||
| Amortization of intangible assets |
2,556 | — | 2,556 | |||||||||||||
| Acquisition and integration costs |
3,942 | — | 3,942 | |||||||||||||
| Restructuring, goodwill impairment, and other related benefits |
(678 | ) | — | (678 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total operating expenses |
1,035,393 | (346,453 | ) | 688,940 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income from operations |
492,680 | 118,040 | 610,720 | |||||||||||||
| Interest income |
1,854 | — | 1,854 | |||||||||||||
| Other income, net |
95 | — | 95 | |||||||||||||
| Interest expense |
(55,578 | ) | — | (55,578 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income before income tax |
439,051 | 118,040 | 557,091 | |||||||||||||
| Income tax expense |
98,689 | 16,641 | (b) | 115,330 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
340,362 | 101,399 | 441,761 | |||||||||||||
| Less: Net income attributable to noncontrolling interest |
— | — | — | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income attributable to Brocade Communications Systems, Inc. |
$ | 340,362 | $ | 101,399 | $ | 441,761 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income per share—basic attributable to Brocade Communications Systems, Inc. stockholders |
$ | 0.81 | $ | 1.05 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income per share—diluted attributable to Brocade Communications Systems, Inc. stockholders |
$ | 0.79 | $ | 1.03 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Shares used in per share calculation—basic |
420,331 | 420,331 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Shares used in per share calculation—diluted |
430,556 | 430,556 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements.
BROCADE COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Fiscal Year Ended November 1, 2014
(Amounts in thousands, except per share data)
| Historical Brocade (as reported) |
SRA Sale (a) |
Notes | Pro Forma | |||||||||||||
| Net revenues: |
||||||||||||||||
| Product |
$ | 1,852,187 | $ | (282,643 | ) | $ | 1,569,544 | |||||||||
| Service |
359,080 | (66,938 | ) | 292,142 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total net revenues |
2,211,267 | (349,581 | ) | 1,861,686 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cost of revenues: |
||||||||||||||||
| Product |
592,441 | (136,188 | ) | 456,253 | ||||||||||||
| Service |
153,033 | (25,578 | ) | 127,455 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total cost of revenues |
745,474 | (161,766 | ) | 583,708 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Gross margin |
1,465,793 | (187,815 | ) | 1,277,978 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
345,549 | (157,281 | ) | 188,268 | ||||||||||||
| Sales and marketing |
554,515 | (179,755 | ) | 374,760 | ||||||||||||
| General and administrative |
84,941 | (2,796 | ) | 82,145 | ||||||||||||
| Amortization of intangible assets |
10,280 | — | 10,280 | |||||||||||||
| Restructuring, goodwill impairment, and other related costs |
89,280 | — | 89,280 | |||||||||||||
| Gain on sale of network adapter business |
(4,884 | ) | — | (4,884 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total operating expenses |
1,079,681 | (339,832 | ) | 739,849 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from operations |
386,112 | 152,017 | 538,129 | |||||||||||||
| Interest income |
665 | — | 665 | |||||||||||||
| Other income, net |
3,601 | — | 3,601 | |||||||||||||
| Interest expense |
(36,757 | ) | — | (36,757 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income before income tax |
353,621 | 152,017 | 505,638 | |||||||||||||
| Income tax expense |
115,650 | 28,560 | (b) | 144,210 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
237,971 | 123,457 | 361,428 | |||||||||||||
| Less: Net income attributable to noncontrolling interest |
— | — | — | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income attributable to Brocade Communications Systems, Inc. |
$ | 237,971 | $ | 123,457 | $ | 361,428 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income per share—basic attributable to Brocade Communications Systems, Inc. stockholders |
$ | 0.55 | $ | 0.83 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income per share—diluted attributable to Brocade Communications Systems, Inc. stockholders |
$ | 0.53 | $ | 0.81 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Shares used in per share calculation—basic |
435,258 | 435,258 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Shares used in per share calculation—diluted |
446,859 | 446,859 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements.
BROCADE COMMUNICATIONS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At July 29, 2017
(Amounts in thousands)
| Historical Brocade (as reported) |
SRA Sale (d) |
Notes | Pro Forma | |||||||||||
| ASSETS |
||||||||||||||
| Current assets: |
||||||||||||||
| Cash and cash equivalents |
$ | 1,179,369 | $ | 23,000 | (e) | $ | 1,202,369 | |||||||
| Accounts receivable, net |
291,989 | (37,819 | ) | 254,170 | ||||||||||
| Inventories |
70,511 | (21,283 | ) | 49,228 | ||||||||||
| Prepaid expenses and other current assets |
87,128 | 12,316 | (e) | 99,444 | ||||||||||
| Current assets held for sale |
26,279 | — | 26,279 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Total current assets |
1,655,276 | (23,786 | ) | 1,631,490 | ||||||||||
| Property and equipment, net |
416,181 | (25,997 | ) | 390,184 | ||||||||||
| Goodwill |
2,255,326 | (28,550 | ) | 2,226,776 | ||||||||||
| Core/developed technology intangible assets, net |
193,959 | — | 193,959 | |||||||||||
| Other intangible assets, net |
159,041 | (5,279 | ) | 153,762 | ||||||||||
| Non-current deferred tax assets |
40,057 | — | 40,057 | |||||||||||
| Other assets |
41,591 | 9,243 | (e) | 50,834 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 4,761,431 | $ | (74,369 | ) | $ | 4,687,062 | |||||||
|
|
|
|
|
|
|
|||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||
| Current liabilities: |
||||||||||||||
| Accounts payable |
$ | 97,074 | $ | (15,269 | ) | $ | 81,805 | |||||||
| Accrued employee compensation |
144,622 | — | 144,622 | |||||||||||
| Deferred revenue |
198,704 | (37,195 | ) | 161,509 | ||||||||||
| Current portion of long-term debt |
76,725 | — | 76,725 | |||||||||||
| Other accrued liabilities |
69,517 | (960 | ) | 68,557 | ||||||||||
| Current liabilities held for sale |
8,421 | — | 8,421 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Total current liabilities |
595,063 | (53,424 | ) | 541,639 | ||||||||||
| Long-term debt, net of current portion |
1,457,602 | — | 1,457,602 | |||||||||||
| Non-current deferred revenue |
85,055 | (18,029 | ) | 67,026 | ||||||||||
| Non-current income tax liability |
92,582 | — | 92,582 | |||||||||||
| Other non-current liabilities |
4,330 | — | 4,330 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
2,234,632 | (71,453 | ) | 2,163,179 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total Brocade stockholders’ equity |
2,524,411 | (2,916 | ) | (f) | 2,521,495 | |||||||||
| Noncontrolling interest |
2,388 | — | 2,388 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Total stockholders’ equity |
2,526,799 | (2,916 | ) | 2,523,883 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total liabilities and stockholders’ equity |
$ | 4,761,431 | $ | (74,369 | ) | $ | 4,687,062 | |||||||
|
|
|
|
|
|
|
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See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements.
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial information includes the following adjustments to reflect the SRA Sale:
| a) | Reflects the revenues and expenses attributable to the SRA Business, which were included in the Company’s historical financial statements. Expenses include those costs directly involved in the revenue producing activity such as selling, general and administrative, marketing and research and development. Such expenses include those incurred by the Company on behalf of the SRA Business. |
The pro forma condensed consolidated statements of operations exclude adjustments (i) of general corporate overhead that do not meet the requirements to qualify for discontinued operations reporting treatment under GAAP, and (ii) that are non-recurring or not material in nature, such as the loss resulted from the SRA Sale further described in note (f) below, fees received under transition service arrangements that are short-term in nature, and SRA Sale transaction costs incurred during the applicable historical periods.
The unaudited pro forma condensed consolidated financial statements have been presented for illustrative and informational purposes only and are not intended to reflect or be indicative of Brocade’s results of operations or financial position had the SRA Sale occurred as of the dates presented, and should not be taken as representative of Brocade’s future consolidated results of operations or financial condition.
| b) | Represents the tax effect of the pro forma adjustments described above at the applicable statutory income tax rates. |
| c) | The unaudited pro forma basic and diluted net income (loss) per share reflect the basic and diluted weighted-average common shares outstanding reported in the Company’s historical financial statements. Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per share is computed using the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares result from the assumed exercise of outstanding stock options, assumed vesting of outstanding restricted stock units (“RSUs”), assumed issuance of stock under the Company’s employee stock purchase plan, and assumed conversion of outstanding convertible senior unsecured notes and exercise of related warrant transactions, all using the treasury stock method. |
As the Company reported a net loss for the nine months ended July 29, 2017, the shares used for net loss per share – diluted attributable to Brocade Communications Systems, Inc. stockholders were the same as the shares used for net loss per share – basic attributable to Brocade Communications Systems, Inc. stockholders. The effect of the pro forma adjustments resulted in unaudited pro forma net income attributable to Brocade Communications Systems, Inc. for the nine months ended July 29, 2017. Consequently, the Company included potentially dilutive common shares in the calculation of unaudited pro forma net income per share – diluted attributable to Brocade Communications Systems, Inc. stockholders. The following table sets forth the reconciliation of weighted-average shares used for unaudited pro forma net income per share – basic and diluted attributable to Brocade Communications Systems, Inc. stockholders for the nine months ended July 29, 2017 (in thousands):
| Basic and diluted weighted-average common shares outstanding, as reported |
408,494 | |||
| Pro forma adjustment to reflect potentially dilutive common shares primarily resulting from assumed vesting of RSUs |
10,458 | |||
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| Pro forma diluted weighted-average shares outstanding used in computing pro forma net income per share, diluted |
418,952 | |||
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| d) | Reflects the assets and liabilities attributable to the SRA Sale, which were included in the Company’s historical financial statements. Goodwill was assigned to the SRA Business based on a relative fair value approach in accordance with GAAP. Also, reflected are the consideration received for the SRA Sale, as well as the resulting losses on sale. See note (e) and note (f) for further detail. |
The following summarizes the components of the pro forma SRA Sale adjustments related to prepaid expenses and other current assets (in thousands):
| July 29, 2017 | ||||
| Current portion of deferred payment purchase consideration |
$ | 3,927 | ||
| Estimated true-up adjustment based on working capital as of July 29, 2017 |
9,550 | |||
| Elimination of prepaid expenses and other current assets attributable to the SRA Business |
(1,161 | ) | ||
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| Net increase to prepaid expenses and other current assets |
$ | 12,316 | ||
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The following summarizes the components of the SRA Sale pro forma adjustments related to other assets (in thousands):
| July 29, 2017 | ||||
| Deferred payment purchase consideration, less current portion |
$ | 14,597 | ||
| Elimination of other assets attributable to the SRA Business |
(5,354 | ) | ||
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| Net increase to other assets |
$ | 9,243 | ||
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| e) | The purchase consideration of the SRA Business includes (i) an upfront closing cash payment equal to $23 million (inclusive of $13 million representing target working capital, which is subject to a post-closing true-up adjustment based on the finally determined amount of working capital), (ii) a deferred payment equal to $20 million to be paid in installments of $1 million per quarter for the first 20 full fiscal quarters of Extreme Networks following the closing of the SRA Sale, and (iii) quarterly earnout payments equal to 50% of the profits of the SRA Business for the five-year period commencing at the end of the first full fiscal quarter of Extreme Networks following the closing of the SRA Sale. |
The deferred payment is recorded at fair value of $18.5 million using an estimated discount of 3%, of which $3.9 million is included in prepaid expense and other current assets for payments due within the next 12 months, and $14.6 million is included in other assets for payments due after 12 months on our unaudited pro forma condensed consolidated balance sheet. In addition, the Company reflected $9.6 million related to an estimated working capital true-up adjustment due from Extreme Networks, representing the difference between target working capital of $13 million and the estimated working capital as of July 29, 2017 of $22.6 million. The final working capital true-up adjustment will be calculated as of the close date, and could be materially different from the estimated amount. See note (d) for further detail.
Earnout payments will be recognized when they become realizable, which is generally when they are received.
The following summarizes the components of the pro forma adjustment recorded to reflect the purchase consideration of the SRA Sale (in thousands):
| July 29, 2017 | ||||
| Closing cash payment recorded to cash and cash equivalents |
$ | 23,000 | ||
| Fair value of deferred payment purchase consideration |
18,524 | |||
| Estimated true-up adjustment based on working capital as of July 29, 2017 |
9,550 | |||
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| Total pro forma purchase consideration |
$ | 51,074 | ||
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| f) | Reflects an estimated pre-tax loss of $2.9 million resulting from the SRA Sale. |