NOTE 7 – ACQUISITIONS

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. As a result, during the preliminary purchase price allocation period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company's operating results in the period in which the adjustments were determined.

Simena

On November 18, 2011, the Company completed the acquisition of Simena, LLC (Simena), an established provider of high performance, low-latency IP packet flow-based network monitoring switching technology that enables IT organizations and service providers to aggregate, filter and control network traffic for data, voice, and video monitoring and cybersecurity deployments. Simena's technology is expected to further strengthen the Company's unified service delivery management strategy by extending visibility capabilities. The technology should enable fine-grained packet-flow control for monitoring environments to better leverage critical network monitoring points. The results of Simena's operations have been included in the consolidated financial statements since that date. The goodwill recognized primarily relates to the expected synergies to be achieved with our current product families and the ability to leverage existing sales and marketing capacity and customer base with respect to the acquired Simena technology.

In connection with the acquisition of Simena, the Company paid the sellers $10.1 million at closing and became obligated to pay the seller up to $10.8 million in additional purchase consideration subject to adjustment based on the final determination of certain assets and liabilities. As a result, a majority of the changes to the value of the contingent consideration would be expected to have an offsetting impact on the recorded values of the assets and liabilities assumed as part of the transaction. Additionally, the Company is working with the seller to get additional information on such assets and liabilities. The Company will continue to refine its estimates of fair value related to these items in the next seven months. Certain information was not available in the reporting period as Simena had not previously created GAAP basis financial statements and the analysis which would underlie estimates thereto.

The contingent liability was recorded at its fair value of $8.0 million at the acquisition date. The Company has re-measured the fair value at March 31, 2012 and will re-measure the fair value of the consideration at each subsequent reporting period and recognize any adjustment to fair value as part of earnings.

The total acquisition date fair value of the consideration was estimated at $18.1 million as follows (in thousands):


Initial cash payment	$	10,086
Estimated fair value of contingent consideration obligation		8,000

Total consideration	$	18,086

The following table summarizes the allocation of the purchase price (in thousands):


Allocation of the purchase consideration:
Current assets	$	2,300
Identifiable intangible assets		4,470
Goodwill		14,013

Total assets acquired		20,783
Current liabilities		(338	)
Deferred revenue		(759	)
Contractual non-compliance liability		(1,600	)
Contingent consideration		(8,000	)

Fair value of consideration transferred	$	10,086

Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill from the Simena acquisition is included within the Company's single reporting unit and is included in the Company's enterprise-level annual review for impairment. The Company expects all of the goodwill and intangible assets acquired as part of this transaction to be deductible for tax purposes.

The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of Simena and the Company. The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):


	Fair Value		Useful Life (Years)
Acquired technology	$	2,740		10
Customer relationships		1,730		10

		$4,470

The weighted average useful life of identifiable intangible assets acquired from Simena is 10 years. Acquired technology is amortized using an accelerated amortization method and customer relationships are amortized using a straight line method.

The Company incurred approximately $160 thousand of acquisition-related costs which are included in general and administrative expense during the fiscal year ended March 31, 2012.

Replay

On October 3, 2011, the Company completed the acquisition of Fox Replay BV (Replay), a leading provider of session reconstruction and replay technology that enables organizations to perform forensic analysis of end-user actions in support of cyberintelligence, information assurance, lawful intercept and general security practices. Replay was acquired to add critical technology and expertise that is expected to provide an important element of our unified service delivery management product strategy to address growing cybersecurity concerns in our target markets. The results of Replay's operations have been included in the consolidated financial statements since that date. The total purchase price of $20.2 million consisted entirely of cash consideration. The goodwill recognized primarily relates to the value in combining Replay's product with our customer base. The purchase price allocation is no longer preliminary.

The following table summarizes the allocation of the purchase price (in thousands):


Allocation of the purchase consideration:
Current assets, including cash and cash equivalents of $547	$	2,310
Fixed assets		85
Identifiable intangible assets		4,950
Goodwill		15,313

Total assets acquired		22,658
Current liabilities		(74	)
Deferred revenue		(715	)
Deferred income tax liabilities		(1,632	)

	$	20,237

Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill from the Replay acquisition is included within the Company's single reporting unit and is included in the Company's enterprise-level annual review for impairment. None of the goodwill or identifiable intangibles associated with this transaction will be deductible for tax purposes.

The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of Replay and the Company. The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):


	Fair Value		Useful Life (Years)
Acquired software	$	1,100		6
Customer relationships		1,400		10
Core technology		2,100		10
Non-compete agreements		350		3

	$	4,950

The weighted average useful life of identifiable intangible assets acquired from Replay is 8.6 years. Acquired software and core technology are amortized using an accelerated amortization method. Customer relationships and non-compete agreements are amortized on a straight-line basis.

The Company incurred approximately $807 thousand of acquisition-related costs which are included in general and administrative expense during the fiscal year ended March 31, 2012.

Psytechnics, Ltd.

On April 1, 2011, the Company acquired all of the outstanding equity of Psytechnics, Ltd. (Psytechnics) a supplier of voice video network monitoring software. Psytechnics was acquired to expand NetScout's voice video monitoring capabilities using Psytechnics' existing software offering, Experience Manager. The results of Psytechnics' operations have been included in the consolidated financial statements since that date. The total purchase price of $17.0 million consisted entirely of cash consideration. The goodwill recognized primarily relates to the value in combining Psytechnic's product with our customer base. The purchase price allocation is no longer preliminary.

The following table summarizes the allocation of the purchase price (in thousands):


Allocation of the purchase consideration:
Current assets, including cash and cash equivalents of $69	$	1,099
Fixed assets		50
Identifiable intangible assets		4,350
Goodwill		13,179

Total assets acquired		18,678
Current liabilities		(1,198	)
Deferred revenue		(466	)

	$	17,014

The Company has analyzed the realizability of the deferred tax assets of Psytechnics and has concluded that it is appropriate to provide a valuation allowance against these balances, given the historical objective evidence. The net asset balance reserved during acquisition accounting is $3.3 million and primarily consists of net operating loss carry forwards and tax basis in intangibles previously amortized for financial reporting purposes attributable to the U.K. operations of the acquired entity.

Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill from the Psytechnics acquisition is included within the Company's single reporting unit and is included in the Company's enterprise-level annual review for impairment. No goodwill or identifiable intangibles associated with this transaction will be deductible for tax purposes.

The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of Psytechnics and the Company. The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):


	Fair Value		Useful Life (Years)
Acquired software	$	1,200		5
Customer relationships		450		10
Core technology		2,700		10

		$4,350

The weighted average useful life of identifiable intangible assets acquired from Psytechnics is 8.6 years. Acquired software and core technology are amortized using an accelerated amortization method. Customer relationships are amortized on a straight-line basis.

The Company incurred approximately $1.0 million of acquisition-related costs which are included in general and administrative expense.

The following table presents unaudited pro forma results of the historical Consolidated Statements of Operations of the Company and Psytechnics, Replay and Simena for the years ended March 31, 2012 and 2011, giving effect to the mergers as if they occurred on April 1, 2011 and 2010 (in thousands, except per share data):


	Year Ended March 31, (unaudited)
	2012		2011
Pro forma revenue	$	315,999	$	303,344
Pro forma net income	$	34,432	$	36,483
Pro forma income per share:
Basic	$	0.82	$	0.87
Diluted	$	0.81	$	0.85
Pro forma shares outstanding
Basic		42,035		42,059
Diluted		42,750		42,973

The pro forma results for the year ended March 31, 2011 primarily includes adjustments for amortization of intangibles, interest income and interest expense. The pro forma results for the year ended March 31, 2012 includes adjustments for amortization of intangibles. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisition been completed on the assumed date, or which may be realized in the future.

Since the date of the acquisitions the Company has recorded $5.5 million of revenue directly attributable to Psytechnics, Replay and Simena within its consolidated financial statements.