Acquisition Of MPC Data Limited

9 Months Ended

Sep. 30, 2011

Acquisition Of MPC Data Limited [Abstract]

Acquisition Of MPC Data Limited

3. Acquisition of MPC Data Limited

On September 11, 2011 we completed the acquisition of MPC Data Ltd ("MPC"), a United Kingdom based provider of embedded software engineering services and products for OEMs, semiconductor companies and high performance application developers. The acquisition is part of our overall growth strategy and is designed to capitalize on the growing market for smart, connected devices by expanding both the breadth of services offered and the geographies that we serve.

We acquired all outstanding shares of MPC preferred and common stock in exchange for total consideration of $7.1 million, which includes $4.8 million of cash paid on the acquisition date, $1.5 million of cash paid in November 2011, and a potential earn-out with an estimated present value of $810,000 as of September 30, 2011. This earn-out will be calculated based on specific revenue earned in specific regions of Europe over the next year and is not capped. If our estimate of applicable revenue is different from actuals by 10%, the impact on the earn-out would be $90,000. As of September 30, 2011, the funds paid in November 2011 and the estimate of the earn-out were classified as other accrued expenses and liabilities. We also acquired $1.5 million in cash and cash equivalents as part of the acquisition, for a net estimated total cash price of $5.6 million.

In connection with the business combination, we incurred merger-related costs, including legal, consulting, accounting and other costs, of $152,000 during the three months ended September 30, 2011 which we recognized as expense in the period.

Accounting for the Acquisition of MPC

The business combination was accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and liabilities assumed at the acquisition date measured at their fair values, including intangible assets acquired consisting of trade names and trademarks, non-compete agreements, and customer relationships. The acquisition of MPC was structured as a stock purchase and therefore the values assigned to the intangible assets and goodwill are not deductible for tax purposes, and as such tax liabilities of $418,000 were recognized as part of the transaction as well. The excess of the purchase price, including the estimate of the earn-out, over the fair value of net assets acquired was recorded as goodwill. Our preliminary allocation of the purchase price to assets and liabilities based upon fair value determinations was as follows (in thousands):

Cash and cash equivalents	$	1,481
Other current assets		1,124
Property, equipment, and furniture		103
Intangible assets – customer relationships		973
Intangible assets – non-compete agreements		206
Intangible assets – trade names and trademarks		96
Current liabilities		(472	)
Tax liabilities		(418	)
Goodwill		3,989
Purchase consideration	$	7,082

The excess of the $7.1 million purchase price over the $3.1 million of identifiable net assets acquired resulted in goodwill of $4.0 million. Of the intangible assets acquired, customer relationships have a weighted-average useful life of 10 years, non-compete agreements have a weighted-average useful life of 2 years, and trade names and trademarks have a weighted-average useful life of 1 year. We will assess the fair value of the earn-out associated with the purchase each period using level 3 inputs represented by management's estimation of future services revenue attributable to MPC through September 30, 2012. Any such changes to the earn-out would be realized as other income (expense) during the period.

Unaudited Pro Forma Results of Operations

The unaudited pro forma results of operations data are being furnished solely for informational purposes and are not intended to represent or be indicative of the consolidated results of operations that we would have reported had the MPC acquisition been completed as of the dates and for the periods presented, nor are they necessarily indicative of future results.

The unaudited pro forma results of operations data are derived from our consolidated financial statements and MPC and include pro forma adjustments relating to the MPC acquisition that are of a recurring nature representing pro forma amortization of intangible assets. Included in these pro forma results are revenue of $333,000 and net income of $118,000 related to MPC since the date of acquisition. The pro forma results were adjusted to assume the $152,000 of nonrecurring expenses directly related to the MPC acquisition were incurred on January 1, 2010. These pro forma results of operations do not give effect to any cost savings, revenue synergies or restructuring costs which may result from the integration of MPC operations.

The unaudited pro forma combined condensed results of operations are presented below as if the MPC acquisition had occurred on January 1, 2010 (amounts in 000's, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
Net sales	$	25,266	$	26,671	$	77,254		$	72,989
Gross profit	$	5,415	$	5,660	$	16,828		$	15,607
Operating income	$	21	$	1,085	$	(81	)	$	2,016
Income before income taxes	$	161	$	1,088	$	(10	)	$	1,592
Net income	$	450	$	1,013	$	16		$	1,411
Basic earnings per share	$	0.04	$	0.10	$	0.00		$	0.14
Diluted earnings per share	$	0.04	$	0.10	$	0.00		$	0.14