BUSINESS COMBINATION

3 Months Ended

Oct. 01, 2011

Business Combinations [Abstract]

BUSINESS COMBINATION

6. BUSINESS COMBINATION

Acquisition of PTI

On August 31, 2010, the Company completed the acquisition and obtained control of PTI pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”) for cash consideration of $30.2 million, of which acquisition-related liabilities of $3.3 million remain outstanding.  An additional approximately $6 million in earn-out consideration and bonus payments are also payable by the Company pursuant to the Merger Agreement for the achievement of gross profit milestones during fiscal year 2011.

Fair Value of Consideration Transferred (in thousands):

Cash consideration	$	30,236
Acquisition date fair value of contingent earn-out consideration		4,087
Acquisition date fair value of previously held interest in PTI		23,672
Total	$	57,995

Immediately prior to the acquisition, remeasurement of our interest in PTI led to a gain of $11 million, which amount is recorded in interest and other income in the condensed consolidated statement of operations. This fair value measurement was based on the per share consideration paid in the transaction, including the fair value of the earn-out, applied to the number of shares held by the Company immediately prior to closing.

In accordance with ASC 805, a liability was recognized for the estimated acquisition date fair value of $4.1 million for the contingent consideration based on the probability of the achievement of PTI’s gross profit target.  Actual achievement of PTI’s gross profit target exceeded 100% of the threshold, and the PTI stockholders will receive the maximum consideration of $4.8 million. In addition, $1.2 million of bonuses will be paid. As of October 1, 2011 there was $7.7 million of restricted cash at PAL, which will be used to settle our earn-out and acquisition-related liabilities.

Allocation of Consideration Transferred

The acquisition was accounted for as a business combination under ASC 805. The purchase price of $58.0 million was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their fair values as of the date of the completion of the acquisition as follows (in thousands):

Net tangible assets	$	26,665
Amortizable intangible assets:
Existing and core technology		7,165
Customer relationships		5,368

Backlog		365
Indefinite-lived intangible asset:
In-process research and development		3,223
Goodwill		15,209
Total	$	57,995

As of the date of acquisition, inventories are required to be measured at fair value. The fair value of inventory of $3.4 million was based on assumptions applied to the PTI acquired inventory balance. In estimating the fair value of finished goods and work-in-progress inventory, the Company made assumptions about the selling prices and selling cost associated with the inventory. The Company assumed that estimated selling prices would yield gross margins consistent with actual margins earned by PTI during the second half of fiscal year 2010. The Company assumed that selling cost as a percentage of revenue would be consistent with actual rates experienced by PTI during the second half of fiscal year 2010.

The fair value of the acquired land and buildings in Shanghai, China was estimated based on the recent real estate transactions of comparable properties in the same geographic area.  The acquired land and buildings are being depreciated over estimated useful lives of 15 to 48 years.

Existing and core technology consisted of products which have reached technological feasibility and relate to the PTI products. The value of the developed technology was determined by discounting estimated net future cash flows of these products. The Company is amortizing the existing and core technology on a straight-line basis over an estimated life of 6 years.

Customer relationships relate to the Company’s ability to sell existing and future versions of products to existing PTI customers. The fair value of the customer relationships was determined by discounting estimated net future cash flows from the customer contracts. The Company is amortizing customer relationships on a straight-line basis over an estimated life of 6 years.

The backlog fair value relates to the estimated selling cost to generate backlog at August 31, 2010. The fair value of backlog at closing was amortized over an estimated life of 3 months and is fully amortized.

In-process research and development (“IPRD”) consisted of the in-process projects to complete development of certain PTI products. The value assigned to IPRD was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. This methodology is referred to as the income approach, which discounts expected future cash flows to present value. The discount rate used in the present value calculations was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the product’s development and success as well as the product’s stage of completion. Acquired IPRD assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, these assets will not be amortized as charges to earnings; instead this asset will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPRD projects, the asset would then be considered a finite-lived intangible asset and amortization of the asset will commence over an expected life of 6 years. Development of the PTI IPRD products is currently estimated to be approximately 97% complete and expected to be completed in the third quarter of fiscal year 2012. Validation, testing and further re-work may be required prior to achieving volume production.

The deferred tax liability of $3.0 million associated with the estimated fair value adjustments of assets acquired and liabilities assumed was recorded using the estimated statutory tax rate in the jurisdictions where the fair value adjustments occurred.

Of the total estimated purchase price paid at the time of acquisition, approximately $15.5 million was allocated to goodwill. Subsequently, goodwill has been reduced by approximately $334,000 as a result of

working capital adjustments and indemnification claims pursuant to the Merger Agreement. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets and is not deductible for tax purposes. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets was the acquisition of an assembled workforce of experienced semiconductor engineers, synergies in products, technologies, skill sets, operations, customer base and organizational cultures that can be leveraged to enable the Company to build an enterprise greater than the sum of its parts. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. In the event that management determines that the value of goodwill has become impaired, the Company will record an expense for the amount impaired during the fiscal quarter in which the determination is made.

The amount of PTI net revenues included in the Company’s condensed consolidated statement of operations  for the three months ended October 1, 2011 was $3.3 million, and from the PTI acquisition date of August 31, 2010 to October 2, 2010, was approximately $1.8 million.

Pro Forma Data for the PTI Acquisition

The following table presents the unaudited pro forma results of the Company as though the PTI acquisition described above occurred at the beginning of the fiscal year on July 4, 2010. The data below includes the historical results of the Company and PTI on a standalone basis through the closing date of acquisition, with adjustments as noted in the supplemental information. The pro forma results presented do not purport to be indicative of the results that would have been achieved had the acquisition been made as of that date nor of the results which may occur in the future.

	Three Months Ended
(unaudited) (in thousands except per share)	October 2, 2010
Revenue	$	46,941
Net income		8,827
Net income per share — basic		0.35
Net income per share — diluted		0.35
Supplemental Information on Pro Forma Adjustments
Pro forma adjustment to revenue
Eliminate intercompany sales	$	(383	)
Total revenue adjustment	$	(383	)
Pro forma adjustments to net income
Depreciation and amortization	$	(868	)
Earnout and compensation expense accruals		(298	)
Eliminate the Company’s share of PTI income		(467	)
Eliminate intercompany sales and costs		(155	)
Total net income adjustments	$	(1,788	)