Amendment No. 1

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HS5lRJk/isXqHjVew4ip4L+x1On12C5PpX8k5QYim87FGDSLJq1QJvZHYl3/Xm2Q btrz5TXyHr8o9w9sTYq+MQ== 0001193125-09-094391.txt : 20090430 0001193125-09-094391.hdr.sgml : 20090430 20090430160954 ACCESSION NUMBER: 0001193125-09-094391 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20090120 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20090430 DATE AS OF CHANGE: 20090430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Riverbed Technology, Inc. CENTRAL INDEX KEY: 0001357326 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 030448754 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-33023 FILM NUMBER: 09783877 BUSINESS ADDRESS: STREET 1: 199 FREMONT STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: (415) 247-8800 MAIL ADDRESS: STREET 1: 199 FREMONT STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 8-K/A 1 d8ka.htm AMENDMENT NO. 1 Amendment No. 1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):

January 20, 2009

RIVERBED TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

Delaware

001-33023

03-0448754

(State or other jurisdiction

of incorporation)

(Commission File Number)

(IRS Employer

Identification No.)

199 Fremont Street

San Francisco, CA 94105

(Address of principal executive offices, including zip code)

(415) 247-8800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Amendment No. 1

This Form 8-K/A is filed as an amendment (Amendment No. 1) to the Current Report on Form 8-K filed by Riverbed Technology, Inc. under Items 2.01, 8.01 and 9.01 on April 30, 2009. Amendment No. 1 is being filed to include the financial information required under Item 9.01.

Item 9.01.

Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The audited financial statements of Mazu Networks Inc. as of December 31, 2007 and 2006 and for the years then ended are filed as Exhibit 99.1 hereto and incorporated herein by this reference.

The unaudited condensed financial statements of Mazu Networks, Inc. as of September 30, 2008 and for the nine-month periods ended September 30, 2008 and 2007 are filed as Exhibit 99.2 hereto and incorporated herein by this reference

(b) Pro Forma Financial Information.

The required pro forma financial information with respect to the Merger is filed as Exhibit 99.3 hereto and incorporated herein by this reference.

(d) Exhibits.


Exhibit No.		Description

23.1		Consent of Ernst & Young LLP, Independent Auditor

99.1		Audited financial statements of Mazu Networks, Inc. as of December 31, 2007 and 2006 and for the years then ended

99.2		Unaudited condensed financial statements of Mazu Networks, Inc. as of September 30, 2008 and for the nine-month periods ended September 30, 2008 and 2007

99.3		Unaudited pro forma condensed combined consolidated financial statements

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		RIVERBED TECHNOLOGY, INC.

Date: April 30, 2009	By:	/s/ Randy Gottfried
		Randy Gottfried
		Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description

23.1		Consent of Ernst & Young LLP, Independent Auditors

99.1		Audited financial statements of Mazu Networks, Inc. as of December 31, 2007 and 2006 and for the years then ended

99.2		Unaudited condensed financial statements of Mazu Networks, Inc. as of September 30, 2008 and for the nine-month periods ended September 30, 2008 and 2007

99.3		Unaudited pro forma condensed combined consolidated financial statements

EX-23.1 2 dex231.htm CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITOR Consent of Ernst & Young LLP, Independent Auditor

Exhibit 23.1

Consent of Ernst & Young LLP

Independent Auditor

We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (Nos. 333-157492, 333-149602, 333-141260 and 333-137502) of Riverbed Technology, Inc. of our report dated December 10, 2008 relating to the financial statements of Mazu Networks, Inc., which appears in the Current Report on Form 8-K/A of Riverbed Technology, Inc. dated April 30, 2009.


Boston, MA
April 29, 2009		/s/ Ernst & Young

EX-99.1 3 dex991.htm AUDITED FINANCIAL STATEMENTS OF MAZU NETWORKS, INC Audited financial statements of Mazu Networks, Inc

Exhibit 99.1

Report of Independent Auditors

The Stockholders and Board of Directors

Mazu Networks, Inc.

We have audited the accompanying balance sheets of Mazu Networks, Inc. (a Delaware corporation) (the “Company”) as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mazu Networks, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 2 and 7 to the financial statements, on January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, and FASB Staff Position FAS 150-5, Issuer’s Accounting Under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable.

/s/ Ernst & Young LLP

December 10, 2008

Boston, Massachusetts

MAZU NETWORKS, INC.

BALANCE SHEET


	December 31
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	2,101,992		$	5,012,858
Accounts receivable from customers, net of reserves of $86,112 and $36,814, respectively		2,003,099			1,637,983
Accounts receivable from related parties		162,482			—
Inventory		791,431			851,157
Prepaid expenses		104,754			108,411

Total current assets		5,163,758			7,610,409
Property and equipment, net (Note 2)		696,062			702,003
Other assets		99,560			52,200
Restricted cash		56,009			51,330

Total assets	$	6,015,389		$	8,415,942

Liabilities and stockholders’ (deficit) equity
Current liabilities:
Accounts payable	$	571,722		$	823,286
Accrued expenses		1,113,767			749,882
Deferred revenue		4,079,097			2,537,210
Current portion of loan payable		—			538,968
Current portion of capital lease obligations		4,419			20,356

Total current liabilities		5,769,005			4,669,702
Deferred revenue, net of current portion		43,192			215,961
Loan payable (Note 4)		4,461,032			2,461,032
Refundable exercise price of restricted common stock (Note 7)		1,063			12,497
Preferred stock warrants		418,321			297,844
Commitments (Note 5)
Stockholders’ (deficit) equity:
Redeemable convertible preferred stock at redemption and liquidation value (Note 6)		42,549,240			42,549,240
Common stock, $0.0001 par value: Authorized – 335,718,900 shares Issued – 15,526,447 and 13,785,562 shares at December 31, 2007 and 2006, respectively		1,553			1,379
Additional paid-in capital		619,675			533,948
Accumulated deficit		(47,839,320	)		(42,317,289	)
Treasury stock, 1,142,167 shares, at cost		(8,372	)		(8,372	)

Total stockholders’ (deficit) equity		(4,677,224	)		758,906

Total liabilities and stockholders’ (deficit) equity	$	6,015,389		$	8,415,942

See accompanying notes.

MAZU NETWORKS, INC.

STATEMENTS OF OPERATIONS


	Year Ended December 31
	2007			2006
Product revenues	$	10,024,731		$	7,569,611
Maintenance and service revenues		3,844,440			2,832,558
Revenues from related parties		238,788			293,752

Total revenues		14,107,959			10,695,921
Cost of revenues – product		2,802,539			1,954,423
Cost of revenues – service		324,144			224,400

Cost of revenues		3,126,683			2,178,823

Gross margin		10,981,276			8,517,098
Operating expenses:
Research and development		4,045,651			3,716,331
Selling, general, and administrative		12,095,413			10,748,460

Total operating expenses		16,141,064			14,464,791

Loss from operations		(5,159,788	)		(5,947,693	)
Interest expense		(587,250	)		(160,661	)
Interest and other income, net		225,007			328,384

Net loss prior to cumulative effect of change in accounting principle		(5,522,031	)		(5,779,970	)
Cumulative effect of change in accounting principle (Note 7)		—			164,322

Net loss	$	(5,522,031	)	$	(5,615,648	)

See accompanying notes.

MAZU NETWORKS, INC.

STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital						Treasury Stock				Total
	Number of Shares	Redemption Value		Number of Shares	$0.0001 Par Value		Additional Paid-In Capital			Accumulated Deficit			Number of Shares	Cost			Stockholders’ Deficit
Balance at December 31, 2005	107,910,184	$	42,051,184	9,125,358	$	912	$	848,114		$	(36,701,641	)	1,132,167	$	(7,372	)	$	6,191,197
Reclassification of warrants upon adoption of FSP 150-5								(425,113	)									(425,113	)
Sale of Series D redeemable convertible preferred stock	2,213,214		498,056															498,056
Exercise of common stock options				2,142,243		214		45,271										45,485
Vesting of restricted stock				2,517,961		253		50,106										50,359
Stock-based compensation expense								15,570										15,570
Repurchase of treasury shares													10,000		(1,000	)		(1,000	)
Net loss											(5,615,648	)						(5,615,648	)

Balance at December 31, 2006	110,123,398		42,549,240	13,785,562		1,379		533,948			(42,317,289	)	1,142,167		(8,372	)		758,906
Exercise of common stock options				1,111,778		111		24,566										24,677
Vesting of restricted stock				629,107		63		12,519										12,582
Stock-based compensation expense								48,642										48,642
Net loss											(5,522,031	)						(5,522,031	)

Balance at December 31, 2007	110,123,398	$	42,549,240	15,526,447	$	1,553	$	619,675		$	(47,839,320	)	1,142,167	$	(8,372	)	$	(4,677,224	)

See accompanying notes.

MAZU NETWORKS, INC.

STATEMENT OF CASH FLOWS


	Year Ended December 31
	2007			2006
Operating activities
Net loss	$	(5,522,031	)	$	(5,615,648	)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle		—			(164,322	)
Change in fair value of warrants		(34,523	)		(20,947	)
Issuance of warrants to reseller		77,000			—
Non-cash interest expense		90,640			43,800
Stock-based compensation expense		48,642			15,570
Depreciation and amortization		524,449			722,855
Changes in assets and liabilities:
Accounts receivable		(527,598	)		138,219
Inventory		243,974			(10,904	)
Prepaid expenses and other assets		3,657			(57,098	)
Accounts payable		(251,564	)		(23,520	)
Accrued expenses		303,885			(182,575	)
Deferred revenue		1,369,118			(1,204,141	)

Net cash used in operating activities		(3,674,351	)		(6,358,711	)
Investing activity
Purchases of property and equipment		(702,756	)		(513,212	)
Financing activities
Net proceeds from sale of redeemable convertible preferred stock		—			498,056
Repurchase of treasury shares		—			(1,000	)
Proceeds from exercise of common stock options		24,677			45,485
Change in restricted cash		(4,679	)		—
Proceeds from issuance of loan payable		2,000,000			2,250,000
Payments under loan payable		(538,968	)		—
Proceeds from issuance of restricted stock		1,148			2,200
Payments under capital lease obligations		(15,937	)		(27,121	)

Net cash provided by financing activities		1,466,241			2,767,620

Decrease in cash and cash equivalents		(2,910,866	)		(4,104,303	)
Cash and cash equivalents at beginning of year		5,012,858			9,117,161

Cash and cash equivalents at end of year	$	2,101,992		$	5,012,858

Supplemental disclosure of cash flow information
Cash paid for interest	$	428,288		$	89,297

Supplemental disclosure of non-cash investing and financing activities
Vesting of restricted stock	$	12,582		$	50,359

Warrants issued to lenders	$	78,000		$	58,000

See accompanying notes.

1. Operations

Mazu Networks, Inc. (the “Company”) was incorporated and commenced operations as a Delaware corporation on May 23, 2000, and is engaged in the development and sale of network infrastructure software.

The Company is subject to risks common to technology-based companies including, but not limited to, the development of new technology, development of markets and distribution channels, dependence on key personnel, and the ability to obtain additional capital as needed to meet its product plans. The Company has a limited operating history and, due to the Company’s stage of development, it has incurred significant operating losses since inception. The Company has incurred cumulative losses to date, and expects to incur a loss in fiscal year 2008. The Company’s ultimate success is dependent upon its ability to successfully develop and market its products.

As shown in the financial statements, at December 31, 2007, the Company has a cash and cash equivalents balance of $2,101,992 and an accumulated deficit of $47,839,320. In March 2008, the Company issued 22,593,765 shares of Series D Preferred Stock resulting in proceeds of $5,000,000. Management believes the Company has sufficient cash resources to continue as a going concern through at least January 1, 2009, based on expected operating results. Should revenues not materialize at planned levels, or additional financing be unavailable to the Company in the future, management would restrict certain planned activities and operations, as necessary, to sustain operations through this period.

2. Significant Accounting Policies

The accompanying financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying financial statements and notes.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company follows the provisions of the American Institute of Certified Public Accountants Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, and SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Accordingly, the Company recognizes revenue from product sales upon delivery to the customer, provided that there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and collection of the related receivable is probable.

The Company uses the residual method to recognize revenue when a contract includes one or more elements to be delivered at a future date, and vendor specific objective evidence (“VSOE”) of the fair value of all undelivered elements (typically maintenance and professional services) exists. Under the residual method, the Company defers revenue recognition of the fair value of the undelivered elements and allocates the remaining portion of the arrangement fee to the delivered elements, and recognizes it as revenue, assuming all other conditions for revenue recognition have been satisfied. This typically happens when installation of the product at the customer site is complete.

As part of an arrangement, the Company typically sells maintenance contracts to its customers. Maintenance services include technical support, as well as rights to unspecified upgrades and enhancements, when and if the Company makes them generally available. The Company recognizes revenues from maintenance services ratably over the term of the maintenance contract period based on VSOE of fair value. VSOE of fair value is based upon the amount charged for maintenance when purchased separately, which is typically done when customers renew their support agreements.

The Company’s warranty period on product sales is typically 90 days. Allowances for estimated uncollectible amounts, returns, and credits are recorded in the same period as the related revenues. Warranty claims have not been material historically.

Deferred revenues represent: (i) amounts the Company had the contractual rights to invoice, and (ii) cash received from customers for products and services in advance of revenue recognition.

Cost of revenues consists primarily of hardware and support personnel salaries, and related costs and depreciation for evaluation equipment.

The Company records revenue net of applicable sales tax collected and remitted to state and local taxing jurisdictions. Taxes collected from customers are recorded as a liability in the balance sheet.

Fair Value of Financial Instruments

Financial instruments consist of cash, cash equivalents, accounts receivable, accounts payable, capital lease obligations, and loans payable. The estimated fair value of these financial instruments approximates their carrying value.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. The Company’s cash and cash equivalents consist of cash and money market funds.

Concentration of Credit Risk

The Company maintains its cash and cash equivalents balances with an accredited financial institution. The Company does not require collateral. The Company performs ongoing evaluations of customers’ financial condition, and has not historically experienced significant credit losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

For the year ended December 31, 2007, no customer comprised more than 10% of total revenues. For the year ended December 31, 2006, one customer, “Customer A”, comprised 13% of total revenues. At December 31, 2007, one customer, “Customer B”, represented 16% of total accounts receivable. At December 31, 2006, one customer, “Customer C”, represented 14% of total accounts receivable.

Inventory

The Company’s inventory is stated at the lower of cost (first-in, first-out) or market. Inventory on hand at December 31, 2007 and 2006 consists of finished goods and purchased materials.

Software Development Costs

All of the Company’s research and development expenses have been charged to operations as incurred. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, the Company will capitalize material software development costs incurred after the technological feasibility of software development projects has been established. For the years ended December 31, 2007 and 2006, no software development costs met the criteria for capitalization.

Property and Equipment

Property and equipment is stated at cost. The Company provides for depreciation and amortization, by charges to operations on a straight-line basis, in amounts estimated to allocate the cost of the assets over their estimated useful lives, as follows:


	December 31
Asset Classification	2007			2006			Useful Life
Furniture and fixtures	$	52,616		$	52,616		5 years
Computers, network equipment, and software		3,606,686			3,408,151		2 – 3 years
Evaluation equipment		1,181,461			861,488		2 years
Leasehold improvements		153,992			153,992		5 years
Equipment under capital lease		510,624			510,624		3 years

Property and equipment, at cost		5,505,379			4,986,871
Accumulated depreciation and amortization–assets under capital lease		(510,624	)		(494,969	)
Accumulated depreciation and amortization–other assets		(4,298,693	)		(3,789,899	)

Property and equipment, net	$	696,062		$	702,003

Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense for the years ended December 31, 2007 and 2006 was $524,449 and $722,855, respectively. Depreciation and amortization expense for assets financed under capital lease agreements was $15,655 and $12,275, and is included in total depreciation and amortization expense for those periods.

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for its stock option plan under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) (revised 2004), Share-Based Payment. The Company adopted SFAS No. 123(R) using the prospective method and, therefore, has not restated the Company’s financial results for prior periods. Under this transition method, stock-based compensation expense in the years ended December 31, 2006 and 2007 includes the compensation expense related to stock options vested in the period for all options granted or modified subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with SFAS No. 123(R).

With respect to awards granted on or after January 1, 2006, the Company has recorded compensation cost based on the grant date fair value, and recognizes the fair value on a straight-line basis over the requisite service period of each award.

based on reported data for a peer group of publicly traded companies for which historical information was available. The average expected life was determined according to the SEC shortcut approach as described in SAB No. 107, Disclosure about Fair Value of Financial Instruments, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest rate is determined by reference to U.S. Treasury Securities with a seven-year maturity. The assumptions used in the Black-Scholes option-pricing model are as follows for stock options issued during 2007 and 2006:


	2007			2006
Risk-free interest rates		3.60-4.00	%		4.54-5.08	%
Expected dividend yield		—	%		—	%
Expected lives		6.25 years			6.25 years
Expected volatility		40-45	%		40	%
Weighted-average fair value for option awards	$	0.04		$	0.01

Forfeitures are estimated based on the Company’s historical analysis of actual stock option forfeitures. The Company has used a nominal estimated forfeiture rate in calculating its stock-based compensation expense for the years ended December 31, 2007 and 2006.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company’s net loss for the years ended December 31, 2007 and 2006 is $48,642 and $15,570 higher, respectively, than if the Company had continued to account for stock-based compensation under APB No. 25.

As of December 31, 2007, there was approximately $215,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in forfeitures. The Company expects to recognize that expense over a weighted-average period of three years.

Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive net loss is the same as net loss for the years ended December 31, 2007 and 2006.

Shipping and Handling Costs

In accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-10, Accounting for Shipping and Handling Fees, the Company has classified the reimbursement by customers of shipping and handling costs as revenue, and the associated cost as cost of revenue. Reimbursed shipping and handling costs were not material in the years ended December 31, 2007 and 2006.

Advertising Costs

Costs incurred for production and communication of advertising initiatives are expensed when incurred. Advertising expenses amounted to approximately $196,000 and $123,000 for the years ended December 31, 2007 and 2006, respectively.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Accounting for Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability, and establishes a fair value

hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect adoption of this standard to have a material impact on its results of operations, financial position, or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year, provided that the company makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Company has not yet completed its evaluation of SFAS No. 159, but does not currently believe that adoption will have a material impact on its results of operations, financial position, or cash flows.

In July 2006, the FASB issued Financial Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes subject to SFAS No. 109, Accounting for Income Taxes. This includes tax positions considered to be “routine”, as well as those with a high degree of uncertainty. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more-likely-than-not to be sustained). Under step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis that is more-likely-than-not to be realized upon ultimate settlement. FIN 48’s use of the term “more-likely-than-not” in steps one and two is consistent with how that term is used in SFAS No. 109 (i.e., a likelihood of occurrence greater than 50%). The Company is required to adopt FIN 48 on January 1, 2009. The Company does not expect that the adoption of FIN 48 will have a material impact the Company’s financial position or results of operations.

3. Income Taxes

The Company accounts for federal and state income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

As of December 31, 2007, the Company has federal and state net operating loss carryforwards of approximately $43,303,000 and $32,864,000 respectively, which may be used to offset future taxable income. The Company also has federal and state research and development credits of approximately $799,000 and $341,000, respectively to offset future tax liability. The NOL and tax credit carryforwards will expire at various dates through 2027, and are subject to review and possible adjustment by the Internal Revenue Service (IRS). The Internal Revenue Code contains provisions that may limit the NOL and tax credit carryforwards available to be used in any given year in the event of certain changes in the ownership interests of significant stockholders.

At December 31, 2007 and 2006, the Company has recorded a full valuation allowance against its deferred tax assets due to the uncertainty surrounding the realizability of this asset. The components of the Company’s net deferred tax assets at December 31, 2007 and 2006 are as follows:


	2007			2006
Net operating loss and credit carryforwards	$	17,923,000		$	15,695,000
Other temporary differences		1,954,000			1,468,000
Valuation allowance		(19,877,000	)		(17,163,000	)

	$	—		$	—

The increase in the valuation allowance in 2007 relates primarily to the net operating loss incurred by the Company.

4. Debt

During June 2005, the Company entered into a loan and security agreement with a financing institution (the “Loan Agreement”), which provides a line of credit for equipment financing, payoff of existing debt, and funds for general corporate purposes up to $3,000,000 (the “2005 Loan Commitment”). Borrowings outstanding under the Loan Agreement are secured by all assets of the Company. In connection with the Loan Agreement, the Company issued to the financing institution a warrant to purchase 406,888 shares of Series C Preferred Stock at a price per share of $0.2213. The value of these warrants, $76,000 was recorded as a deferred financing cost, and was amortized to interest expense over the drawdown period of the 2005 Loan Commitment. In 2005, the Company borrowed $750,000 under the 2005 Loan Commitment.

The Loan Agreement originally provided for a one-year drawdown period originally ending on June 30, 2006. During June 2006, the Company amended the Loan Agreement to extend the drawdown period for the 2005 Loan Commitment to end on June 30, 2007 and to modify the payment schedule as follows: monthly payments of interest only at a variable rate of the prime lending rate plus 225 basis points per annum until June 30, 2007, followed by 36 fixed monthly payments of principal and interest at a rate equal to the prime rate at June 30, 2007 plus 225 basis points, and then an interest-only payment equal to 9% of the amount borrowed. The Company is accreting the interest-only payment of $270,000 due at the end of the payment term over the term of the 2005 Loan Commitment using the effective interest method. In connection with the amendment, the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213 in exchange for cash consideration of $100. The value of the warrants, $29,000, was recorded as a deferred financing cost, and was being amortized to interest expense over the repayment term of the 2005 Loan Commitment, as amended.

In December 2006, the Company borrowed the remaining $2,250,000 in funds available under the 2005 Loan Commitment, increasing the total amount owed to the lender to $3,000,000. In connection with the drawdown of the remaining funds, the Company issued a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213 to the financing institution (Note 7). The value of these warrants, $29,000, was recorded as a deferred financing cost, and was being amortized to interest expense over the remaining term of the 2005 Loan Commitment, as amended.

In June 2007, the Company received additional debt financing in the amount of $2,000,000 (the “2007 Loan Commitment”), which the lender agreed to provide pursuant to terms of a second amendment to the Loan Agreement, which is payable in monthly payments of interest only at a variable rate of the then current prime lending rate plus 225 basis points per annum until December 31, 2007, followed by 30 fixed monthly payments of principal and interest at a rate equal to the prime rate at December 31, 2007 plus 225 basis points, and then an interest-only payment equal to 9% of the amount borrowed. The Company is accreting the interest-only payment of $180,000 due at the end of the payment term ratably over the term of the 2007 Loan Commitment using the effective interest method. In connection with this amendment, the Company issued a warrant to purchase 723,000 shares of Series D Preferred Stock at a price per share of $0.2213 to the financing institution (Note 7). The value of these warrants, $78,000, and the unamortized balance from the previously issued warrants, $43,339, was recorded as a deferred financing cost, and is being amortized to interest expense over the 2007 Loan Commitment period.

As of December 31, 2007, the Company was in compliance with all covenants. Subsequent to that date, the Company was not in compliance with certain restrictive covenants; however, the lender provided the Company with a waiver which allowed the Company to cure the default created by non-compliance with these covenants.

In April 2008, the Company amended the Loan Agreement to modify the payment schedules under both the 2005 and 2007 Loan Commitments as follows: monthly payments of interest only at a variable rate of the prime lending rate plus 225 basis points per annum until March 31, 2009, followed by 36 fixed monthly payments of principal and interest at a rate equal to the prime rate at March 31, 2009 plus 225 basis points and then an interest-only payment of $550,000 due in May 2012. Future maturities of the Loan Agreement as amended in April 2008 are as follows:


Fiscal Year	Amount
2008	$	—
2009		999,486
2010		1,447,921
2011		1,591,624
2012		422,001

	$	4,461,032

5. Commitments

The Company leases certain equipment and facilities under operating and capital lease arrangements, and is obligated to pay monthly rent through 2008. The minimum future rental payments under the lease agreements are approximately as follows:


	Operating		Capital
Fiscal year:
2008	$	508,820	$	4,500
2009-2012		—		—

	$	508,820		4,500

Less amount representing interest				(81	)

Present value of minimum lease payments				4,419
Less current portion				(4,419	)

Long-term portion			$	—

Rent expense for the years ended December 31, 2007 and 2006 was approximately $536,000 and $512,000, respectively. In connection with the facilities lease agreement, the Company has placed in escrow $51,330 as a deposit on the facility at December 31, 2007 and 2006. These amounts are included in restricted cash in the accompanying balance sheets.

6. Stockholders’ Equity

Redeemable Convertible Preferred Stock

The Company has authorized 202,321,871 shares of redeemable convertible preferred stock, of which 110,123,398 shares are issued and outstanding at December 31, 2007 and 2006, as follows:


	2007		2006
Series A/A-1 redeemable convertible preferred stock (Series A Preferred Stock), $0.0001 par value:
Authorized – 7,797,500 shares
Issued and outstanding – 7,737,500 shares at December 31, 2007 and 2006, respectively, at liquidation and redemption value	$	7,737,500	$	7,737,500
Series B/B-1 redeemable convertible preferred stock (Series B Preferred Stock), $0.0001 par value:
Authorized – 14,731,321 shares
Issued and outstanding – 14,656,053 shares at December 31, 2007 and 2006, at liquidation and redemption value		15,388,854		15,388,854
Series C/C-1 redeemable convertible preferred stock (Series C Preferred Stock), $0.0001 par value:
Authorized – 137,362,054 shares
Issued and outstanding – 55,362,283 shares at December 31, 2007 and 2006, at liquidation and redemption value		12,251,673		12,251,673
Series D redeemable convertible preferred stock (Series D Preferred Stock), $0.0001 par value:
Authorized – 42,430,996 shares
Issued and outstanding –32,367,562 shares at December 31, 2007 and 2006, at liquidation and redemption value		7,171,213		7,171,213

	$	42,549,240	$	42,549,240

In January 2006, the Company sold 2,213,214 shares of Series D Preferred Stock, at $0.22 per share, for proceeds of $498,056.

The rights, preferences, and privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock (the “Preferred Stock”) are listed below:

Dividends

The Company shall not declare or pay any dividends on shares of common stock unless the holders of the Preferred Stock then outstanding receive an amount per share (on an as-converted basis) equal to the dividends declared, set aside, or paid per share of common stock.

Voting Rights

The Series A, B, C, and D Preferred Stockholders are entitled to vote on all matters with the common stockholders as if they were one class of stock. The Series A, B, C, and D Preferred Stockholders are entitled to the number of votes equal to the number of shares of common stock into which each share of the respective Preferred Stock is then convertible.

Redemption

Upon receiving notice from a majority of Preferred Stockholders requesting that shares of Preferred Stock be redeemed, out of funds legally available, the Company will be required to redeem, subject to certain conditions and not less than 60 days following receipt of notice, the maximum percentage of Series A, B, C, and D Preferred Stock, as listed in the following table, at a rate of $1.00, $1.05, $0.22, and $0.22 per share, respectively, plus any dividend declared but unpaid thereon for each holder that requests redemption, subject to any stock dividend, stock split, combination, or other similar recapitalization affecting such shares.


Earliest Redemption Dates	Maximum Portion of Shares of Preferred Stock to Be Redeemed
January 21, 2010	33	%
January 21, 2011	50	%
January 21, 2012	100	%

Conversion

All shares of the Series A, B, C, and D Preferred Stock shall be automatically converted into shares of common stock upon the firm commitment of an initial public offering at a per share price of at least $5.00 (subject to appropriate adjustment any stock dividend, stock split, combination, or other similar recapitalization affecting such shares), and resulting in net proceeds to the Company of at least $25,000,000. Each share of Series A and B Preferred Stock is convertible into 2.27 and 2.30 shares of common stock, at the option of the holder. Each share of Series C and D Preferred Stock is convertible at the option of the holder into one share of common stock, adjusted for certain dilutive events, as defined.

Liquidation

In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Company, as defined, the holders of the Series A, B, C, and D Preferred Stock then outstanding will be entitled to be paid an amount greater than (i) $1.00, $1.05, $0.22, and $0.22 per share, respectively, plus any dividends declared but unpaid on such shares, or (ii) such amount per share as would have been payable had each such share been converted into common stock pursuant to any liquidation prior to any payment to common stockholders. If the funds of the Company are insufficient to redeem the total number of redeemed shares, the holders of Preferred shares shall share ratably in any funds legally available for distribution of such shares in proportion to the respective amounts which would otherwise be payable if such shares were paid in full. Amounts remaining after payment to the Series A, B, C, and D Preferred Stockholders, if any, will be shared among all holders of stock junior to the Preferred Stock.

Common Stock

The Company has reserved shares of common stock for issuance upon conversion or exercise of the following:


		Amount
Common stock options		38,794,807
Series A redeemable convertible preferred stock		18,480,075
Series B redeemable convertible preferred stock		33,882,038
Series C redeemable convertible preferred stock		137,362,054
Series D redeemable convertible preferred stock		42,430,996

		270,949,970

7. The 2000 Stock Plan

In May 2000, the Company’s Board of Directors (the “Board”) approved the 2000 Stock Plan (the “2000 Plan”), which was amended in October 2000. The 2000 Plan provides for the granting of incentive stock options (“ISOs”) and non-qualified stock options (“NSOs”), awards of common stock, and the sale of common stock to key employees, directors, and consultants of the Company. Under the 2000 Plan, the Board may authorize the sale of common stock to employees, directors, and consultants of the Company. The purchase price for the common stock shall be determined by the Board, but shall not be less than the fair market value on the date of the grant. In addition, for each grant, the Board will determine the terms under which the Company may repurchase such shares.

Stock Options

Under the 2000 Plan, the Board may grant ISOs and NSOs to key employees, directors, and consultants of the Company. ISOs may be granted only to employees, with the exercise price not less than 100% of the fair market value on the date of grant, or in the case of 10% or greater shareholders, not less than 110% of the fair market value. NSOs may be granted to key employees, directors, or consultants of the Company. The exercise price of each non-qualified stock option shall be determined by the Board, but shall not be less than the par value of the common stock on the date of grant. In general, the vesting period for common stock options is four years. All stock options issued under the 2000 Plan expire within ten years, or in the case of 10% or greater stockholders, within five years.

Activity under the 2000 Plan is summarized as follows:


	Number of Shares		Exercise Price per Share		Weighted- Average Exercise Price
Outstanding at December 31, 2005	22,513,417		$	0.02 – $0.10	$	0.04
Granted	8,115,720		$	0.02 – $4.02	$	0.02
Exercised	(2,252,243	)	$	0.02 – $0.10	$	0.02
Cancelled	(3,442,970	)	$	0.02 – $0.10	$	0.02

Outstanding at December 31, 2006	24,933,924		$	0.02 – $4.02	$	0.04
Granted	7,150,025		$	0.02 – $0.05	$	0.02
Exercised	(1,169,174	)	$	0.02 – $0.10	$	0.02
Cancelled	(4,127,492	)	$	0.02 – $0.10	$	0.02

Outstanding at December 31, 2007	26,787,283		$	0.02 – $4.02	$	0.04

Vested and expected to vest at December 31, 2007	24,108,555		$	0.02 – $4.02	$	0.04

Exercisable at December 31, 2007	17,183,085		$	0.02 – $4.02	$	0.03

The aggregate intrinsic value of stock options exercised during the years ended December 31, 2007 and 2006 was $34,198 and $0, respectively as determined as of the date of exercise. Exercise of options under the Plan resulted in cash receipts of $25,825 and $47,685 for the years ended December 31, 2006 and 2006.

Information regarding stock options as of December 31, 2007 is as follows:


Range of Exercise Prices	Number of Shares Outstanding	Outstanding Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Number of Shares Exercisable	Exercisable Weighted- Average Remaining Contractual Life (Years)
$0.02	23,473,014	7.67	$	0.02	16,340,508	7.28
$0.05	2,485,809	9.84	$	0.05	93,784	9.83
$0.10	728,460	3.96	$	0.10	721,710	3.94
$2.02-$4.02	100,000	8.93	$	2.77	27,083	8.93

	26,787,283				17,183,085

Restricted Common Stock

Employees are able to exercise options before those options are vested. The shares received upon early exercise are restricted subject to vesting conditions which match the original option vesting schedule. The Company has the right to purchase back from terminated employees, at the original purchase price, some or all of the unvested common stock at the date of termination. The cash paid for the exercise price for these types of exercises is considered a deposit or a prepayment of the exercise price which is recognized by the Company as a liability until the restriction lapses. Furthermore, these shares are not considered issued for accounting purposes until they vest. A summary of the status and activity for restricted stock units under the Plan for the year ended December 31, 2007 is presented in the following table:


	Number of Units		Weighted- Average Grant Date Fair Value (Per Share)
Unvested at December 31, 2005	3,032,796		$	0.01
Options early exercised	110,000		$	0.02
Vested	(2,517,961	)	$	0.01
Forfeited	—		$	—

Unvested at December 31, 2006	624,835		$	0.01
Options early exercised	57,396		$	0.01
Vested	(629,107	)	$	0.01
Forfeited	—		$	—

Unvested at December 31, 2007	53,124		$	0.01

Warrants

In October 2000, the Company issued a warrant to a bank in connection with a financing agreement. The warrant provides for the purchase of 10,000 shares of Series A Preferred Stock at $1.00 per share, and is immediately exercisable. The value of the warrant, $8,851, was included in the accompanying statement of operations as interest expense in the year issued. This warrant is still outstanding as of December 31, 2007.

In March 2001, the Company issued a warrant to a bank in connection with the security and loan agreement. The warrant provides for the purchase of 50,000 shares of Series A Preferred Stock at $1.00 per share and is immediately exercisable. The value of the warrant, $44,034, was amortized into interest expense over the life of the loan, which was repaid in 2005. This warrant is still outstanding as of December 31, 2007.

In February 2003, the Company issued a warrant to a bank in connection with the line of credit agreement. The warrant provides for the purchase of 86,667 shares of Series B Preferred Stock at $1.05 per share and is immediately exercisable. The value of the warrant, $56,953, was amortized into interest expense over the life of the loan, which was repaid and closed in 2005. This warrant is still outstanding as of December 31, 2007.

In July 2004, the Company issued a warrant to holders of promissory notes related to a bridge financing in exchange for cash consideration of $20,141. The warrant provided for the purchase of 1,351,610 shares of Series C Preferred Stock at $0.2213 per share and is immediately exercisable. The value of the warrant, $239,500, was amortized into interest expense over the life of the loan, which was converted into Series C Preferred Stock in November 2004. This warrant is still outstanding as of December 31, 2007.

In June 2005, the Company issued a warrant to the bank in connection with the Loan Agreement (Note 4) in exchange for cash consideration of $100. The warrant provides for the purchase of 406,688 shares of Series C Preferred Stock at $0.2213 per share and is immediately exercisable. The value of the warrant, $76,000, was amortized into interest expense over the life of the commitment term of the Loan Agreement. During the year ended December 31, 2006, $38,000 is included in the accompanying statement of operations as interest expense. This warrant is still outstanding as of December 31, 2007.

In connection with the June 2006 amendment to the Company’s Loan Agreement (Note 4), the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213. The value of the warrant, $29,000, was deferred and amortized as additional interest expense over the term of the Loan Agreement, as amended. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

In December 2006, in connection with the drawdown on the Loan Agreement (Note 4), the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213. The value of the warrant, $29,000, was deferred and amortized as additional interest expense over the term of the Loan Agreement, as amended. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

In June 2007, the Company received additional debt financing in an amendment to the 2005 Line of Credit. In connection with this amendment, the Company issued a warrant to purchase 723,000 shares of Series D Preferred Stock at a price per share of $0.2213 to the financing institution. The value of these warrants, $78,000, and the unamortized balance from the previously issued warrants, $43,339, was recorded as a deferred financing cost, and is being amortized to interest expense over the amended repayment period. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

During the years ended December 31, 2007 and 2006, the Company recognized non-cash interest expense related to the amortization of deferred financing costs of $30,640 and $43,800, respectively. At December 31, 2007, unamortized deferred financing costs of $99,560 are included as other assets in the accompanying balance sheet.

During 2006, the Company entered into an agreement with a reseller which contained provisions under which the reseller would receive up to 9,040,434 warrants to purchase Series D Preferred Stock. The Company accounts for these warrants in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As of December 31, 2007, 723,235 warrants were issued, and valued at $77,000. The value of these warrants are recorded as a reduction in revenues in accordance with EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).

Effective January 1, 2006, the Company adopted FASB Staff Position FAS 150-5, Issuer’s Accounting Under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable (“FSP 150-5”), which requires that warrants to purchase redeemable preferred stock be classified as liabilities upon adoption. In addition, the value of the warrants is remeasured to the then-current fair value upon adoption of FSP 150-5, and marked to market at each reporting date thereafter. The difference in fair value upon adoption is recorded as a cumulative effect adjustment in the Company’s statement of operations. Subsequent changes in fair value are recorded to other income.

Upon adoption of FSP 150-5 on January 1, 2006, the Company reclassified outstanding warrants to purchase redeemable preferred stock from equity to long-term liabilities and remeasured these warrants using the Black-Scholes option pricing model. The Company recorded a cumulative effect adjustment of $164,322 in the year ended December 31, 2006, and recorded other income of $34,523 and $20,947 in the years ended December 31, 2007 and 2006, respectively, as a result of changes in the fair value of all outstanding warrants to purchase redeemable preferred stock.

8. 401(k) Profit Sharing Plan

In January 2001, the Board adopted the Mazu Networks, Inc. 401(k) Plan (the “Plan”). All employees are eligible to contribute 1% to 15% of their annual compensation, subject to IRS limitations. The Company may elect to make discretionary contributions to the Plan. There have been no discretionary contributions made by the Company to date.

9. Related Party Transactions

During the years ended December 31, 2007 and 2006, the Company recognized revenue from the sale of products and services to one of its Preferred Stockholders for a total of approximately $238,788 and $293,752, respectively. As of December 31, 2007 and 2006, the Company was owed $162,482 and $0, respectively, for outstanding invoices related to these transactions.

10. Subsequent Events

In March 2008, the Company issued 22,593,765 shares of Series D Preferred Stock, resulting in proceeds of $5,000,000.

EX-99.2 4 dex992.htm UNAUDITED CONDENSED FINANCIAL STATEMENTS OF MAZU NETWORKS Unaudited condensed financial statements of Mazu Networks

Exhibit 99.2

MAZU NETWORKS, INC.

CONDENSED BALANCE SHEET

(Unaudited)


	September 30 2008			December 31 2007
Assets
Current assets:
Cash and cash equivalents	$	3,797,615		$	2,101,992
Accounts receivable from customers, net of reserves		1,961,918			2,003,099
Accounts receivable from related parties		—			162,482
Inventory		603,755			791,431
Prepaid expenses		102,042			104,754

Total current assets		6,465,330			5,163,758
Property and equipment, net (Note 2)		657,167			696,062
Other assets		78,948			99,560
Restricted cash		56,009			56,009

Total assets	$	7,257,454		$	6,015,389

Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	425,729		$	571,722
Accrued expenses		1,527,959			1,113,767
Deferred revenue		5,086,465			4,079,097
Current portion of loan payable		658,412			—
Current portion of capital lease obligations		1,417			4,419

Total current liabilities		7,699,982			5,769,005
Deferred revenue, net of current portion		128,235			43,192
Loan payable (Note 4)		3,802,620			4,461,032
Refundable exercise price of restricted common stock		169			1,063
Preferred stock warrants		401,766			418,321
Commitments (Note 5)
Stockholders’ deficit:
Redeemable convertible preferred stock at redemption and liquidation value (Note 6)		47,549,240			42,549,240
Common stock, $0.0001 par value: Authorized – 335,718,900 shares Issued – 15,790,782 and 15,526,447 shares at September 30, 2008 and December 31, 2007 , respectively		1,579			1,553
Additional paid-in capital		686,522			619,675
Accumulated deficit		(53,004,287	)		(47,839,320	)
Treasury stock, 1,142,167 shares, at cost		(8,372	)		(8,372	)

Total stockholders’ deficit		(4,775,318	)		(4,677,224	)

Total liabilities and stockholders’ deficit	$	7,257,454		$	6,015,389

See accompanying notes.

MAZU NETWORKS, INC.

CONDENSED STATEMENT OF OPERATIONS

(Unaudited)


	Nine Months Ended September 30
	2008			2007
Product revenues	$	6,581,959		$	7,129,781
Maintenance and service revenues		3,610,563			2,705,475

Total revenues		10,192,522			9,835,256
Cost of revenues – product		1,275,041			1,878,896
Cost of revenues – service		452,977			247,814

Cost of revenues		1,728,018			2,126,710

Gross margin		8,464,504			7,708,546
Operating expenses:
Research and development		3,265,336			2,759,770
Selling, general, and administrative		10,104,549			9,193,981

Total operating expenses		13,369,885			11,953,751

Loss from operations		(4,905,381	)		(4,245,205	)
Interest expense		(372,704	)		(433,702	)
Interest and other income, net		113,118			179,841

Net loss	$	(5,164,967	)	$	(4,499,066	)

See accompanying notes.

MAZU NETWORKS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30
	2008			2007
Operating activities
Net loss	$	(5,164,967	)	$	(4,499,066	)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative change in accounting principle
Change in fair value of warrants		(33,971	)		(27,842	)
Issuance of warrants to reseller		17,414			77,000
Non-cash interest expense		114,013			7,795
Stock-based compensation expense		61,184			29,734
Depreciation and amortization		413,624			372,846
Changes in assets and liabilities:
Accounts receivable		203,663			(217,213	)
Inventory		187,676			(153,534	)
Prepaid expenses and other assets		2,712			8,379
Accounts payable		(145,993	)		(120,598	)
Accrued expenses		346,788			157,981
Deferred revenue		1,092,411			1,441,569

Net cash used in operating activities		(2,905,446	)		(2,922,949	)
Investing activity
Purchases of property and equipment		(374,726	)		(341,226	)

Net cash used in investing activities		(374,726	)		(341,226	)

Financing activities
Proceeds from sale of redeemable convertible preferred stock, net of issuance costs of $26,000		4,974,000			—
Proceeds from exercise of common stock options		4,797			23,284
Proceeds from issuance of loan payable		—			2,000,000
Payments under loan payable		—			(233,915	)
Other financing activities		(3,002	)		(17,996	)

Net cash provided by financing activities		4,975,795			1,771,373

Increase/(decrease) in cash and cash equivalents		1,695,623			(1,492,802	)
Cash and cash equivalents at beginning of year		2,101,992			5,012,858

Cash and cash equivalents at end of year	$	3,797,615		$	3,520,056

See accompanying notes.

1. Operations

2. Significant Accounting Policies

The accompanying financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying financial statements and notes.

Basis of Presentation

The accompanying condensed balance sheet as of September 30, 2008, the condensed statements of operations for the nine months ended September 30, 2008 and September 30, 2007, and the condensed statements of cash flows for the nine months ended September 30, 2008 and September 30, 2007 are unaudited. The accompanying condensed statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2007.

The accompanying condensed financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP. They do not include all of the financial information and footnotes required by GAAP for complete financial statements. The Company believes the condensed unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for the fair presentation of our balance sheet as of September 30, 2008, and our results of operations and cash flows for the nine months ended September 30, 2008 and September 30, 2007. All adjustments are of a normal recurring nature. The results for the nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2008.

Use of Estimates

Revenue Recognition

SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Accordingly, the Company recognizes revenue from product sales upon delivery to the customer, provided that there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and collection of the related receivable is probable.

The Company’s warranty period on software and hardware is typically 90 days. Allowances for estimated uncollectible amounts, returns, and credits are recorded in the same period as the related revenues. Warranty claims have not been material historically.

Deferred revenues represent: (i) amounts the Company had the contractual rights to invoice, and (ii) cash received from customers for products and services in advance of revenue recognition.

Cost of revenues consists primarily of hardware and support personnel salaries, and related costs and depreciation for evaluation equipment.

Fair Value of Financial Instruments

Effective January 1, 2008, the Company implemented Statement of Financial Accounting Standards No. 157, Fair Value Measurement, or SFAS 157, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, the Company has elected to defer implementation of SFAS 157 as it relates to its non-financial assets and non-financial liabilities until January 1, 2009. The Company is evaluating the impact, if any, this standard will have. In October 2008, the FASB issued FSB SFAS 157-3, Determining the Fair Value of a Financial Asset when the Market for that Asset is Not Active (“FSB 157-3”), to clarify how an entity would determine fair value in an inactive market. The adoption of FSB 157-3 in October 2008 did not have an impact on the Company’s financial statements.

In accordance with SFAS 157, the Company measures its cash equivalents at fair value. All of the Company’s cash equivalents are classified within Level 1. This is because the Company’s cash equivalents are valued using observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets.

The Company’s warrants are classified as Level 3. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. The value of these warrants is calculated the Black-Scholes model. These warrants and the respective assumptions are discussed further in Note 8.

Other financial instruments consist of accounts receivable, accounts payable, capital lease obligations, and loans payable. The estimated fair value of these financial instruments approximates their carrying value.

Cash and Cash Equivalents

Concentration of Credit Risk

The Company maintains its cash and cash equivalent balances with an accredited financial institution. The Company does not require collateral. The Company performs ongoing evaluations of customers’ financial condition, and has not historically experienced significant credit losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

For the nine-months ended September 30, 2008 and 2007, no customer comprised more than 10% of total revenues. At September 30, 2008, one customer, “Customer A”, represented 11% of total accounts receivable. At September 30, 2007, one customer, “Customer B”, represented 12% of total accounts receivable.

Inventory

Inventory consists primarily of hardware and related component parts and is stated at the lower of cost (on a first-in, first-out basis) or market. Inventory is comprised of the following:


	September 30, 2008		December 31, 2007
Raw materials	$	131,494	$	340,555
Finished goods		180,060		204,340
Deferred cost of product revenue		292,201		246,536

Total	$	603,755	$	791,431

Software Development Costs

All of the Company’s research and development expenses have been charged to operations as incurred. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, the Company will capitalize material software development costs incurred after the technological feasibility of software development projects has been established. For the nine months ended September 30, 2008 and 2007, no software development costs met the criteria for capitalization.

Property and Equipment


Asset Classification	September 30 2008			December 31 2007			Useful Life
Furniture and fixtures	$	82,950		$	52,616		5 years
Computers, network equipment, and software		3,801,866			3,606,686		2 – 3 years
Evaluation equipment		1,330,673			1,181,461		2 years
Leasehold improvements		153,992			153,992		5 years
Equipment under capital lease		510,624			510,624		3 years

Total Property and equipment		5,880,105			5,505,379
Accumulated depreciation and amortization		(5,222,938	)		(4,809,317	)

Property and equipment, net	$	657,167		$	696,062

Expenditures for maintenance and repairs are charged to income as incurred. Depreciation and amortization expense for the nine-months ended September 30, 2008 and 2007 was $413,624 and $372,846, respectively.

Stock-Based Compensation

Upon adoption of SFAS No. 123(R), the Company selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. The fair value of stock option awards subsequent to January 1, 2006 is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Expected volatility was calculated based on reported data for a peer group of publicly traded companies for which historical information was available. The average expected life was determined according to the SEC shortcut approach as described in SAB No. 107 and No. 110, Disclosure about Fair Value of Financial Instruments, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest rate is determined by reference to U.S. Treasury Securities with a seven-year maturity. The assumptions used in the Black-Scholes option-pricing model are as follows for stock options issued during the nine months ended September 30, 2008 and 2007:


	2008			2007
Risk-free interest rates		3.00% - 3.50	%		4.54% - 5.08	%
Expected dividend yield		—	%		—	%
Expected lives		6.25 years			6.25 years
Expected volatility		46% - 50	%		46% - 50	%
Weighted-average fair value for option awards	$	0.04		$	0.04

As of September 30, 2008, there was approximately $278,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under all equity compensation plans. Stock-based compensation expense in the nine months ended September 30, 2008 and 2007, was $61,184 and $29,734, respectively.

Comprehensive Income (Loss)

Shipping and Handling Costs

Advertising Costs

Costs incurred for production and communication of advertising initiatives are expensed when incurred. Advertising expenses amounted to approximately $217,000 and $182,000 for the nine months ended September 30, 2008 and 2007, respectively.

New Accounting Pronouncements

In February 2008, the FASB issued Staff Position (FSP) No. 157-2, which delayed the effective date of SFAS No. 157 one year for all non-financial assets and non-financial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. Assets and liabilities measured at fair value under SFAS No. 157 in the nine months ended September 30, 2008 did not have a material impact on our financial statements. In accordance with FSP No. 157-2, the Company will measure the remaining assets and liabilities no later than the quarter ended March 31, 2009, and have not yet determined the impact of this standard on its financial statements.

3. Income Taxes

The Company accounts for federal and state income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences reverse. The Company records a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. At September 30, 2008 and December 31, 2007 the deferred tax assets were fully reserved.

In July 2006 the Financial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions taken or expected to be taken in a company’s income tax return. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company is required to adopt FIN 48 on January 1, 2009. The Company does not expect that the adoption of FIN 48 will have a material impact the Company’s financial position or results of operations.

Since inception the Company has incurred operating losses and, accordingly, has not recorded a provision for income taxes for any of the periods presented.

4. Debt

The Loan Agreement originally provided for a one-year drawdown period originally ending on June 30, 2006. During June 2006, the Company amended the Loan Agreement to extend the drawdown period for the 2005 Loan Commitment to end on June 30, 2007 and to modify the payment schedule as follows: monthly payments of interest only at a variable rate of the prime lending rate plus 225 basis points per annum until June 30, 2007, followed by 36 fixed monthly payments of principal and interest at a rate equal to the prime rate at June 30, 2007 plus 225 basis points, and then an interest-only payment equal to 9% of the amount borrowed. The Company began accreting the interest-only payment of $270,000 due at the end of the payment term over the term of the 2005 Loan Commitment using the effective interest method. In connection with the amendment, the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213 in exchange for cash consideration of $100. The value of the warrants, $29,000, was recorded as a deferred financing cost, and was being amortized to interest expense over the repayment term of the 2005 Loan Commitment, as amended.

In June 2007, the Company received additional debt financing in the amount of $2,000,000 (the “2007 Loan Commitment”), which the lender agreed to provide pursuant to terms of a second amendment to the Loan Agreement, which is payable in monthly payments of interest only at a variable rate of the then current prime lending rate plus 225 basis points per annum until December 31, 2007, followed by 30 fixed monthly payments of principal and interest at a rate equal to the prime rate at December 31, 2007 plus 225 basis points, and then an interest-only payment equal to 9% of the amount borrowed. . The Company began accreting the incremental interest-only payment of $180,000 due at the end of the payment term ratably over the term of the 2007 Loan Commitment using the effective interest method. In connection with this amendment, the Company issued a warrant to purchase 723,000 shares of Series D Preferred Stock at a price per share of $0.2213 to the financing institution (Note 7). The value of these warrants, $78,000, and the unamortized balance from the previously issued warrants, $43,339, was recorded as a deferred financing cost, and is being amortized to interest expense over the 2007 Loan Commitment period.

In April 2008, the Company amended the Loan Agreement to modify the payment schedules under both the 2005 and 2007 Loan Commitments as follows (the “2008 Loan Commitment”): monthly payments of interest only at a variable rate of the prime lending rate plus 225 basis points per annum until March 31, 2009, followed by 36 fixed monthly payments of principal and interest at a rate equal to the prime rate at March 31, 2009 plus 225 basis points and then an interest-only payment of $550,000 due in May 2012. The Company is accreting the interest-only payment of $550,000 due at the end of the payment term ratably over the term of the 2008 Loan Commitment using the effective interest method. Future maturities of the Loan Agreement as amended in April 2008 are as follows:


Fiscal Year	Amount
2008	$	—
2009		999,486
2010		1,447,921
2011		1,591,624
2012		422,001

	$	4,461,032

The Loan Agreement does not have any financial covenants or any subjective acceleration clauses; however, it does contain certain restrictive covenants. In the event the Company was in default of any of these covenants, the financing institution would have the right to call all amounts due under term notes outstanding. As of September 30, 2008, the Company was not in compliance with all covenants, but received a waiver for those in which it was not in compliance.

5. Commitments

The Company leases certain equipment and facilities under operating and capital lease arrangements, and is obligated to pay monthly rent through January 2009.

Rent expense for the nine months ended September 30, 2008 and 2007 was approximately $492,750 and $340,466, respectively. In connection with the facilities lease agreement, the Company has placed in escrow $56,009 as a deposit on the facility. This amount is included in restricted cash as of September 30, 2008 and December 31, 2007 in the accompanying balance sheets.

6. Stockholders’ Equity

Redeemable Convertible Preferred Stock

The Company has authorized 224,615,638 shares at September 30, 2008 and 202,321,871 shares at December 31, 2007 of redeemable convertible preferred stock, of which 132,707,163 and 110,123,398 shares are issued and outstanding at September 30, 2008 and December 31, 2007, respectively as follows:


	September 30 2008		December 31 2007
Series A/A-1 redeemable convertible preferred stock (Series A Preferred Stock), $0.0001 par value:
Authorized – 7,797,500 shares at September 30, 2008 and December 31, 2007
Issued and outstanding – 7,737,500 shares at September 30, 2008 and December 31, 2007, at liquidation and redemption value	$	7,737,500	$	7,737,500
Series B/B-1 redeemable convertible preferred stock (Series B Preferred Stock), $0.0001 par value:
Authorized – 14,731,321 shares at September 30, 2008 and December 31, 2007
Issued and outstanding – 14,656,053 shares at September 30, 2008 and December 31, 2007, at liquidation and redemption value		15,388,854		15,388,854
Series C/C-1 redeemable convertible preferred stock (Series C Preferred Stock), $0.0001 par value:
Authorized – 137,362,054 shares at September 30, 2008 and December 31, 2007
Issued and outstanding – 55,362,283 shares at September 30, 2008 and December 31, 2007 , at liquidation and redemption value		12,251,673		12,251,673
Series D redeemable convertible preferred stock (Series D Preferred Stock), $0.0001 par value:
Authorized – 64,724,763 shares at September 30, 2008 and 42,430,996 shares at December 31, 2007
Issued and outstanding – 53,484,406 shares at September 30, 2008 and 32,367,562 at December 31, 2007, at liquidation and redemption value		12,171,213		7,171,213

	$	47,549,240	$	42,549,240

In March 2008, the Company issued 22,593,765 shares of Series D Preferred Stock, resulting in proceeds of $5,000,000.

The rights, preferences, and privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock (the “Preferred Stock”) are listed below:

Dividends

Voting Rights

Redemption


Earliest Redemption Dates	Maximum Portion of Shares of Preferred Stock to Be Redeemed
January 21, 2010	33	%
January 21, 2011	50	%
January 21, 2012	100	%

Conversion

Liquidation

7. Stock Options

Employees are able to exercise options before those options are vested. The shares received upon early exercise are restricted subject to vesting conditions which match the original option vesting schedule. The Company has the right to purchase back from terminated employees, at the original purchase price, some or all of the common stock unvested common stock at the date of termination. The cash paid for the exercise price for these types of exercises is considered a deposit or a prepayment of the exercise price which is recognized by the Company as a liability until the restriction lapses. Furthermore, these shares are not considered issued for accounting purposes until they vest.

8. Warrants

As of September 30, 2008, the company had the following warrants vested outstanding:


Number of Shares	Series of Convertible Preferred Stock	Conversion Ratio
60,000	Series A	2.17:1
74,286	Series B	2.19:1
2,300,548	Series C	1.00:1
1,627,043	Series D	1.00:1

During the nine months ended September 30, 2008 and 2007, the Company recognized non-cash interest expense related to the amortization of deferred financing costs of $20,612 and $12,445, respectively. As of September 30, 2008 and December 31, 2007, unamortized deferred financing costs of $78,948 and $99,560 are included as other assets in the accompanying balance sheet.

During 2006, the Company entered into an agreement with a reseller which contained provisions under which the reseller would receive up to 9,040,434 warrants to purchase Series D Preferred Stock. The Company accounts for these warrants in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). In the nine months ended September 30, 2008 and 2007, the Company recorded a reduction in revenues of $17,414 and $77,000, respectively, for these warrants.

Effective January 1, 2006, the Company adopted FASB Staff Position FAS 150-5, Issuer’s Accounting Under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable (“FSP 150-5”), which requires that warrants to purchase redeemable preferred stock be classified as liabilities upon adoption. In the nine months ended September 30, 2008 and 2007 the Company recorded other income of $33,971 and $27,842 as a result of changes in the fair value of all outstanding warrants to purchase redeemable preferred stock.

9. 401(k) Profit Sharing Plan

10. Related Party Transactions

During the nine months ended September 30, 2008 and 2007, the Company recognized revenue from the sale of products and services to one of its Preferred Stockholders for a total of approximately $122,000 and $201,000, respectively.

11. Subsequent Events

On January 20, 2009, The Company entered into an Agreement of Merger with Riverbed Technology, Inc. pursuant to which, upon the terms and subject to the conditions set forth therein; (a) Mazu became a wholly-owned subsidiary of Riverbed; and (b) Riverbed Technology, Inc: (i) acquired all of the outstanding securities of Mazu; (ii) made payments totaling approximately $25.0 million in cash promptly following the closing; and (iii) will potentially make payments totaling up to $22.0 million in cash based on achievement of certain bookings targets for the one-year period from April 1, 2009 through March 31, 2010. The closing of the Merger occurred on February 19, 2009.

EX-99.3 5 dex993.htm UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED Unaudited pro forma condensed combined consolidated

Exhibit 99.3

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF

RIVERBED TECHNOLOGY, INC. AND MAZU NETWORKS, INC.

The following unaudited pro forma combined consolidated financial statements are based on the historical financial statements of Riverbed Technology, Inc. and Mazu Networks, Inc. (“Mazu”) after giving effect to Riverbed’s acquisition of Mazu on February 19, 2009, and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined balance sheet as of September 30, 2008 is presented as if the acquisition of Mazu had occurred on September 30, 2008.

The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2008, and year ended December 31, 2007, are presented as if the Mazu acquisition had occurred on January 1, 2007 and were carried forward through each of the aforementioned respective periods.

The allocation of the purchase price used in the unaudited pro forma condensed combined financial statements is based upon preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as we finalize the valuations of the net tangible assets and intangible assets. Any change could result in material variances between our future financial results and the amounts presented in these unaudited condensed combined financial statements, including variances in fair values recorded, as well as expenses and cash flows associated with these items.

The unaudited pro forma condensed combined financial statements are prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated as of the dates indicated or that may be achieved in the future. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and associated cost savings that we may achieve with respect to the combined companies.

The unaudited pro forma condensed combined financial statements should be read in conjunction with our historical consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2007 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, the historical financial statements of Mazu for the year ended December 31, 2007 included as Exhibit 99.1, the historical financial statements of Mazu as of and for the nine-months ended September 30, 2008 included as Exhibit 99.2, and other information pertaining to us and Mazu contained in this Form 8-K/A.

RIVERBED TECHNOLOGY, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

September 30, 2008

(in thousands)


	Historical
	September 30, 2008						Pro Forma				Pro Forma
	Riverbed Technology, Inc.			Mazu Networks, Inc.			Adjustments				Combined
ASSETS
Current assets:
Cash and cash equivalents	$	117,324		$	3,798		$	(27,512	)	A	$	93,610
Marketable securities		164,180			—			—				164,180
Trade receivables, net		43,245			1,961			—				45,206
Inventory		13,796			340			303		B		14,439
Prepaid expenses and other current assets		11,418			366			258		C, N		12,042

Total current assets		349,963			6,465			(26,951	)			329,477

Fixed assets, net		21,614			657			(324	)	D		21,947
Goodwill		—			—			10,334		E		10,334
Intangible assets		—			—			23,500		F		23,500
Other assets		9,146			135			(108	)	G, N		9,173

Total assets	$	380,723		$	7,257		$	6,451			$	394,431

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,539		$	426		$	—			$	18,965
Accrued compensation and related benefits		13,029			—			—				13,029
Other accrued liabilities		27,469			1,530			—				28,999
Deferred revenue		40,451			5,086			(3,700	)	C		41,837
Current portion of long-term debt		—			658			(658	)	A		—

Total current liabilities		99,488			7,700			(4,358	)			102,830

Deferred revenue non-current		9,836			128			(73	)	C		9,891
Long-term debt		—			3,803			(3,803	)	A		—
Other long-term liabilities		302			402			9,909		H		10,613

Total long-term liabilities		10,138			4,333			6,033				20,504

Stockholders’ equity (deficit):
Mandatorily redeemable preferred stock		—			47,549			(47,549	)	I		—
Common stock and additional paid-in-capital		318,067			680			(680	)	I		318,067
Deferred stock-based compensation		(1,469	)		—			—				(1,469	)
Accumulated deficit		(45,189	)		(53,005	)		53,005		I		(45,189	)
Accumulated other comprehensive loss		(312	)					—				(312	)

Total stockholders’ equity		271,097			(4,776	)		4,776				271,097

Total liabilities and stockholders’ equity	$	380,723		$	7,257		$	6,451			$	394,431

See accompanying notes to unaudited pro forma condensed combined financial statements.

RIVERBED TECHNOLOGY, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2008

(in thousands, except per share amounts)


	Historical
	Nine months ended September 30, 2008						Pro Forma				Pro Forma
	Riverbed Technology, Inc.			Mazu Networks, Inc.			Adjustments				Combined
Revenue:
Product	$	185,574		$	6,582		$	—			$	192,156
Support and services		55,547			3,611			—				59,158

Total revenue		241,121			10,193			—				251,314
Cost of revenue:
Cost of product		45,153			1,275			2,220		J		48,648
Cost of support and services		20,151			453			—				20,604

Total cost of revenue		65,304			1,728			2,220				69,252

Gross profit		175,817			8,465			(2,220	)			182,062
Operating expenses:
Sales and marketing		100,992			9,066			1,111		J, L		111,169
Research and development		43,278			3,265			—				46,543
General and administrative		29,925			1,039			(40	)	L		30,924
Other charges		11,000			—			—				11,000
Other acquisition-related costs		—			—			550		K		550

Total operating expenses		185,195			13,370			1,621				200,186

Operating income (loss)		(9,378	)		(4,905	)		(3,841	)			(18,124	)
Other income, net		5,059			(260	)		151		M		4,950

Income (loss) before provision for income taxes		(4,319	)		(5,165	)		(3,690	)			(13,174	)
Provision for income taxes		8,335			—			(1,224	)	N		7,111

Net income (loss)	$	(12,654	)	$	(5,165	)	$	(2,466	)		$	(20,285	)

Net income (loss) per share, basic and diluted	$	(0.18	)								$	(0.29	)
Shares used in computing basic and diluted net income (loss) per share		70,915										70,915

See accompanying notes to unaudited pro forma condensed combined financial statements.

RIVERBED TECHNOLOGY, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2007

(in thousands, except per share amounts)


	Historical
	Year ended December 31, 2007					Pro Forma				Pro Forma
	Riverbed Technology, Inc.		Mazu Networks, Inc.			Adjustments				Combined
Revenue:
Product	$	196,622	$	10,264		$	—			$	206,886
Support and services		39,784		3,844			—				43,628

Total revenue		236,406		14,108			—				250,514
Cost of revenue:
Cost of product		51,068		2,803			2,960		J		56,831
Cost of support and services		14,856		324			—				15,180

Total cost of revenue		65,924		3,127			2,960				72,011

Gross profit		170,482		10,981			(2,960	)			178,503
Operating expenses:
Sales and marketing		95,652		10,982			1,566		J, L		108,200
Research and development		39,696		4,046			—				43,742
General and administrative		24,834		1,113			(68	)	L		25,879
Other acquisition-related costs		—		—			550		K		550

Total operating expenses		160,182		16,141			2,048				178,371

Operating income (loss)		10,300		(5,160	)		(5,008	)			132
Other income (expense), net		9,733		(362	)		154		M		9,525

Income (loss) before provision for income taxes		20,033		(5,522	)		(4,854	)			9,657
Provision (benefit) for income taxes		5,235		—			(1,678	)	N		3,557

Net income (loss)	$	14,798	$	(5,522	)	$	(3,176	)		$	6,100

Net income per share, basic	$	0.22								$	0.09
Net income per share, diluted	$	0.20								$	0.08
Shares used in computing basic net income per share		68,020									68,020
Shares used in computing diluted net income per share		73,244									73,244

See accompanying notes to unaudited pro forma condensed combined financial statements.

RIVERBED TECHNOLOGY, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. BASIS OF PRO FORMA PRESENTATION

The unaudited pro forma condensed combined balance sheets as of September 30, 2008, and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2008, and for the year ended December 31, 2007, are based on the historical financial statements of Riverbed Technology, Inc. and those of Mazu Networks, Inc. after giving effect to the Mazu acquisition on February 19, 2009 and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

We account for business combinations pursuant to Financial Accounting Standards Board Statement No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)). In accordance with SFAS No. 141(R), we are required to recognize the assets acquired, the liabilities assumed, measured at their fair values as of the acquisition date. Significant assumptions and estimates have been made in determining the purchase price and the allocation of the purchase price in the unaudited pro forma condensed combined financial statements. These preliminary estimates and assumptions are subject to change during the purchase price measurement period as we finalize the valuations of the net tangible assets, intangible assets and contingent consideration. In particular, the final valuations of identifiable intangible assets, the fair value of the contingent consideration and associated tax effects may change significantly from our preliminary estimates. These changes could result in material variances between our future financial results and the amounts presented in these unaudited condensed combined financial statements, including variances in fair values recorded, as well as expenses and cash flows associated with these items.

Accounting Periods Presented

The unaudited pro forma condensed combined balance sheet as of September 30, 2008 is presented as if the Mazu acquisition had occurred on September 30, 2008.

Reclassifications

The following reclassifications have been made to the presentation of Mazu’s historical balance sheet in order to conform to Riverbed’s presentation:

•

Deferred cost of revenue of approximately $0.3 million was reclassified from inventory to prepaid expenses and other current assets.

The following reclassifications have been made to the presentation of Mazu’s historical statement of operations in order to conform to Riverbed’s presentation

•

Revenue from related parties has been reclassified to product revenues;

•

Selling, general and administrative expenses have been separately classified as either sales and marketing expenses or general and administrative expenses.

2. PURCHASE PRICE ALLOCATION

We acquired Mazu Networks, Inc. (“Mazu”) on February 19, 2009, by means of a merger of a wholly-owned subsidiary with and into Mazu, such that Mazu became a wholly-owned subsidiary of ours. We acquired Mazu, among other reasons, to meet enterprise and service provider customer demands by extending our suite of WAN optimization products to include global application performance, reporting and analytics.

The estimated acquisition date fair value of consideration transferred, assets acquired and the liabilities assumed for Mazu are presented below, represents our best estimates.

Preliminary Fair Value of Consideration Transferred

Pursuant to the merger agreement we made payments totaling approximately $23.1 million in cash for all of the outstanding securities of Mazu promptly following the closing. In addition, we will potentially make additional payments (“acquisition-related contingent consideration”) totaling up to $22.0 million in cash, based on achievement of certain bookings targets for the one-year period from April 1, 2009 through March 31, 2010 (the “Earn-Out period”), with up to $16.6 million to be paid to Mazu shareholders and up to $5.4 million to be paid to former employees of Mazu as an incentive bonus provided generally that such former Mazu employees are employees of Riverbed at the time the acquisition-related contingent consideration is earned.

The total acquisition date fair value of the consideration transferred is estimated at $33.0 million, which includes the initial payments totaling $23.1 million in cash and the estimated fair value of acquisition-related contingent consideration to be paid to Mazu shareholders totaling $9.9 million. The total acquisition date fair value of consideration transferred is estimated as follows:


(in thousands)
Payment to Mazu shareholders	$	23,051
Acquisition-related contingent consideration		9,909

Total acquisation-date fair value	$	32,960

In accordance with SFAS 141(R), a liability will be recognized for an estimate of the acquisition date fair value of the acquisition-related contingent consideration based on the probability of achievement of the bookings target. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the bookings targets, will be recognized in earnings in the period the estimated fair value change. The fair value estimate assumes a probability weighted bookings of approximately $21.5 million. Actual achievement of bookings below $16.0 million would reduce the liability to zero and achievement of bookings of $35.0 million or more would increase the liability to $16.6 million. A change in fair value of the acquisition-related contingent consideration could have a material affect on the statement of operations and financial position in the period of the change in estimate.

We estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement as defined by SFAS No. 157, Fair Value Measurements. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. The estimated fair value of acquisition-related contingent consideration of $9.9 million includes amounts to be distributed directly to shareholders, discounted at 13%, but excludes a fair value estimate of $3.8 million to be paid to former employees of Mazu.

The estimated fair value of acquisition-related contingent consideration of $3.8 million to be paid to the former employees of Mazu is considered compensatory and will be recognized as compensation cost, recorded in operating expense, over the Earn-Out period provided generally that such former Mazu employees are employees of Riverbed at the time the acquisition-related contingent consideration is earned.

Preliminary Allocation of Consideration Transferred

Under the purchase method of accounting, the identifiable assets acquired, and liabilities assumed were recognized and measured as of the acquisition date based on their estimated fair values as of the February 19, 2009, the acquisition date. The excess of the acquisition date fair value of consideration transferred over estimated fair value of the net tangible assets and intangible assets was recorded as goodwill.

The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date. Estimates of deferred tax assets both current and non-current are subject to change, pending the finalization of certain tax returns.


(in thousands)
Cash and cash equivalents	$	2,582
Accounts receivable		2,569
Other tangible assets		1,481
Intangible assets		23,500

Total identifiable assets acquired		30,132
Accounts payable and other liabilities		(2,379	)
Loan payable		(5,004	)
Deferred revenue		(1,500	)

Total liabilities assumed		(8,883	)

Net identifiable assets acquired		21,249
Goodwill		11,711

Net assets acquired	$	32,960

Intangible Assets

Management engaged a third-party valuation firm to assist in the determination of the fair value of the intangible assets. In our determination of the fair value of the intangible assets we considered, among other factors, the best use of acquired assets, analyses of historical financial performance and estimates of future performance of Mazu’s products. The fair values of identified intangible assets were calculated using an income approach and estimates and assumptions provided by Mazu’s and our management. The rates utilized to discount net cash flows to their present values were based on a weighted average cost of capital of 19%. This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors would require in an investment in companies similar in size and operating in similar markets as Mazu. The following table sets forth the components of identified intangible assets associated with the Mazu acquisition and their estimated useful lives:


(in thousands)	Useful life	Fair Value
Existing technology	5 years	$	12,100
Patents	5 years		2,700
Maintenance agreements	5 years		6,100
Customer contracts	5 years		2,000
Trademarks	3 years		600

Total intangible assets		$	23,500

In accordance with FSP No. 142-3, we determined the useful life of intangible assets based on the expected future cash flows associated with the respective asset. Existing technology is comprised of products that have reached technological feasibility and are part of Mazu’s product line. There were no in-process research and development assets as of the acquisition date. Patents are related to the design and development of Mazu’s products and this proprietary know-how can be leveraged to develop new technology and products and improve their existing products. Customer relationships and service agreements represent the underlying relationships and agreements with Mazu’s installed customer base. Trademarks represent the fair value of the brand and name recognition associated with the marketing of Mazu’s products and services. Amortization of existing technology and patents is included in cost of revenue, and amortization expense for customer relationships and trademarks is included in operating expenses.

Goodwill

Of the total estimated purchase price, approximately $11.7 million was allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. In accordance with the SFAS No. 142, goodwill resulting from business is tested for impairment at least annually (more frequently if certain indicators are present). In the event that management determines that the value of goodwill has become impaired, we will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. None of the goodwill is expected to be deductible for income tax purposes.

Deferred Revenues

In connection with the purchase price allocation, we estimated the fair value of the service obligations assumed from Mazu as a consequence of the acquisition. The estimated fair value of the service obligations was determined using a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the service obligations. The estimated costs to fulfill the service obligations were based on the historical direct costs and indirect costs related to Mazu’s service agreements with its customers. Direct costs include personnel directly engaged in providing service and support activities, while indirect costs consist of estimated general and administrative expenses based on normalized levels as a percentage of revenue. Profit associated with selling efforts was excluded because Mazu had concluded the selling efforts on the service contracts prior to the date of our acquisition. The estimated research and development costs associated with support contracts have not been included in the fair value determination, as these costs were not deemed to represent a legal obligation at the time of acquisition. We recorded $1.5 million of deferred revenue to reflect the estimate of the fair value of Mazu’s service obligations assumed.

Pre-Acquisition Contingencies

We have evaluated and continue to evaluate pre-acquisition contingencies related to Mazu that existed as of the acquisition date. If these pre-acquisition contingencies that existed as of the acquisition date become probable in nature and estimable during the remainder of the measurement period, amounts recorded for such matters will be made in the measurement period and, subsequent to the measurement period, in our results of operations.

3. PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS

Pro forma adjustments giving effect to the acquisition and the related financing in the unaudited pro forma condensed combined financial statements are as follows:

To record cash paid for Mazu common stock of $23.1 million and the paydown of Mazu’s loan payable of $4.5 million at the acquisition date.

To record the fair value of Mazu inventories purchased as part of the acquisition at estimated selling prices less the sum of costs of selling and a reasonable profit margin for the sales efforts.

To adjust Mazu deferred revenue and deferred cost balances to the estimated fair value of the obligation.

To record the difference between the fair value and the historical carrying amounts of Mazu property and equipment. Mazu’s property and equipment consists primarily of evaluation product and computer equipment, which will not be used in the future operations and is considered to have no alternate market value.

To record estimated goodwill for the Mazu acquisition.

To record acquired Mazu indentified intangible assets.

To adjust the fair value of the deferred financing costs of the Mazu warrants to zero.

To record the estimated contingent consideration to be paid to the former shareholders of Mazu upon certain performance targets being met.

To eliminate Mazu’s historical stockholders’ equity

To record amortization expense related to the acquired Mazu indentified intangible assets as if the acquisition had occurred at the beginning of the periods presented. The following table sets forth this amortization:


(in thousands)	Nine months ended September 30, 2008		Year ended December 31, 2007
Cost of product	$	2,220	$	2,960
Sales and marketing		1,365		1,820

	$	3,585	$	4,780

To record direct acquisition costs of $0.6 million for legal, accounting, valuation and other professional services.

To record the impact on depreciation as if the acquisition and related fair value adjustments to the historical carrying amounts of Mazu property and equipment had occurred at the beginning of the periods presented.

The following table sets forth this depreciation:


(in thousands)	Nine months ended September 30, 2008			Year ended December 31, 2007
Sales and marketing	$	(254	)	$	(254	)
General and administrative		(40	)		(68	)

	$	(294	)	$	(322	)

To record the impact on interest expense had the paydown of Mazu’s loan payable and the extinguishment of Mazu’s warrants on the acquisition date occurred at the beginning of the periods presented.

To record the pro forma income tax impact at the weighted average estimated income tax rates applicable to the jurisdictions in which the pro forma adjustments are expected to be recorded. The pro forma combined provision for income taxes does not reflect the amounts that would have resulted had Riverbed and Mazu filed consolidated income tax returns during the periods presented.

The following table sets forth these estimated provisions:


(in thousands)	Nine months ended September 30, 2008			Year ended December 31, 2007
Total proforma adjustments recorded
before provision for income taxes	$	(3,690	)	$	(4,854	)
Estimated effective tax rate		33.2	%		34.6	%

Estimated provision for income taxes applicable to pro forma adjustments	$	(1,224	)	$	(1,678	)

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