4. BUSINESS COMBINATIONS

BridgeCo

On May 19, 2011 SMSC completed the acquisition of BridgeCo, Inc. (“BridgeCo”), a leader in wireless networked audio technologies. BridgeCo's JukeBlox(TM) technology connects tablets, smartphones, PCs, Macs and other consumer electronics products by enabling consumers to access their local or cloud-based music library from any device and from any room in the home. Its JukeBlox software platform, with integrated WiFi® support, enables music streaming to virtually all home audio equipment including home theater systems, A/V receivers, radios, wireless speakers and portable music player docking stations. BridgeCo's technology has been adopted by some of the largest consumer electronics brands in the world including Pioneer, Philips, Denon, Marantz, JBL, B&W and Harmon/Kardon.

As of the date of acquisition, the majority of BridgeCo's assets were located in the United States with certain operations in India and Japan. The functional currency of BridgeCo's operations in the United States is the U.S. dollar (“USD”), in India, the Indian Rupee and in Japan, the Japanese Yen.

SMSC made an initial investment of $41.0 million in cash (net of cash acquired). The terms of the purchase agreement provided for potential earnout payments of up to $5.0 million in 2012 and up to $22.5 million in 2013 to former BridgeCo shareholders, dependent on BridgeCo reaching certain revenue goals in calendar years 2011 and 2012.

In addition, an employee incentive bonus plan was established as part of the merger agreement in which a portion of the earnout payment due to shareholders was apportioned to employees contingent upon continuous future employment as of the specified payout dates established by the plan. This portion of the earnout was not included as part of the contingent consideration liability but is being charged to earnings over the required service period as earned.

The fair value of the contingent consideration at acquisition of $8.8 million was estimated by applying the income approach. That measure was based on significant inputs that are unobservable in the market, and are therefore level 3 inputs. Key assumptions included a discount rate of 19% and a probability-adjusted level of forecasted quarterly revenues.

The following table summarizes the components of the purchase price at fair value (in millions):

Cash acquired	$	(0.4	)
Cash consideration paid		41.4
Liability for contingent consideration		8.8
Total consideration	$	49.8

The following table summarizes the allocation of the purchase price at fair value (in millions):

Receivables	$	0.6
Inventories		1.0
Other current assets		0.6
Property,plant and equipment		0.4
Customer relationships		1.9
Trade name		0.1
Technology		7.4
Goodwill (all non-deductible for tax purposes)		40.2
Deferred tax assets		0.4
Other non current assets		0.3
Non-interest bearing liabilities		(2.4	)
Deferred tax liabilities		(0.7	)
Net assets	$	49.8

The results of BridgeCo's operations subsequent to May 19, 2011 have been included in the Company's consolidated results of operations. In fiscal 2012, BridgeCo contributed $28.1 million in revenue.

The following unaudited pro forma financial information presents the combined operating results of SMSC and BridgeCo as if the acquisition had occurred as of March 1, 2010. Pro forma data is subject to various assumptions and estimates, and is presented for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.

The unaudited pro forma financial information is presented in the following table (in thousands):

	Fiscal year ended February 29, 2012		Fiscal year ended February 28, 2011

Sales and revenues	$	415,101	$	416,636
Net income	$	7,540	$	3,391
Basic net income per share	$	0.33	$	0.15
Diluted net income per share	$	0.32	$	0.15

Symwave

On November 12, 2010 SMSC completed the acquisition of Symwave, Inc. (“Symwave”), a global fabless semiconductor company supplying high-performance analog/mixed-signal connectivity solutions utilizing proprietary technology, IP and silicon design capabilities. Symwave had approximately 90 employees, of which over 60 were in Asia. The functional currency of Symwave's operations in the United States is the U.S. dollar (“USD”) and in China is the Chinese Yuan Renminbi (“CNY”).

SMSC made an initial $5.2 million equity investment in Symwave in fiscal 2010, resulting in an equity stake of approximately 14 percent, and in fiscal 2011 provided $3.1 million in bridge financing to Symwave. At acquisition, the initial equity investment was revalued to $2.0 million and an impairment loss of $3.2 million was recorded within income from operations. The terms of the purchase agreement provide for quarterly cash payments to former Symwave shareholders upon achievement of certain revenue and gross profit margin goals. As a result, no cash was paid at acquisition and SMSC recorded a $3.1 million liability for contingent consideration. The fair value of the initial equity investment of $2.0 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore level 3 inputs. Key assumptions include a discount rate of 15 percent and a probability-adjusted level of quarterly revenues and gross profit margins.

The following table summarizes the components of the purchase price at fair value (in millions):

Fair value of initial investment in Symwave	$	2.0
Assumption of liability for overdue accounts payable		4.1
Assumption of liability for notes payable		3.2
Liability for contingent consideration		3.1
	$	12.4

The following table summarizes the allocation of the purchase price at fair value (in millions):

Cash and cash equivalents	$	1.5
Inventories		3.4
Accounts receivable		3.3
Other current assets		0.3
Fixed assets		2.0
Customer relationships		0.3
Trade name		0.2
Technology		3.6
Goodwill (all non-deductible for tax purposes)		1.7
Deferred tax assets		1.5
Accounts payable and accrued liabilities		(5.4	)
	$	12.4

The results of Symwave's operations subsequent to November 12, 2010 have been included in the Company's consolidated results of operations.

The following unaudited pro forma financial information presents the combined operating results of SMSC and Symwave as if the acquisition had occurred as of the beginning of each period presented. There were no pro forma adjustments in fiscal 2012 since Symwave results were included in SMSC results for the entire period. Pro forma data is subject to various assumptions and estimates, and is presented for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.

The unaudited pro forma financial information for the fiscal years ended February 28, 2011 and 2010 is presented in the following table (in thousands):

	Fiscal year ended February 28, 2011		Fiscal year ended February 28, 2010

Sales and revenues	$	413,918	$	308,936
Net income (loss)	$	5,863	$	(19,445	)
Basic net income (loss) per share	$	0.26	$	(0.88	)
Diluted net income (loss) per share	$	0.25	$	(0.88	)

During the fourth quarter of fiscal 2011 the Company initiated a plan to reduce costs and investments, including reducing investment in the former Symwave business (see Note 11 - Restructuring).

STS

On June 14, 2010 SMSC acquired Wireless Audio IP B.V. ("STS"), a fabless designer of plug-and-play wireless solutions for consumer audio streaming applications, including home theater, headphones, LED TVs, PCs, gaming and automotive entertainment. Customers include many of the industry's leading consumer and PC brands. STS' robust, low latency digital audio baseband processor and integrated module solutions are highly complementary to SMSC's Kleer wireless audio products. The majority of STS' net assets are located in the Netherlands and Singapore, and the functional currency of STS'operations in the Netherlands is the Euro and in Singapore is the Singapore dollar.

The following table summarizes the components of the purchase price at fair value (in millions):

Cash	$	22.0
Liability for contingent consideration		1.2
	$	23.2

The following table summarizes the allocation of the purchase price at fair value (in millions) :

Cash and cash equivalents	$	0.1
Inventories		0.2
Other current assets		0.1
Fixed assets		0.3
Customer relationships		3.9
Trade name		0.3
Technology		4.2
Goodwill (all non-deductible for tax purposes)		19.4
Other long-term assets		0.1
Accounts payable and accrued liabilities		(2.6	)
Other long-term liabilities		(1.1	)
Deferred tax liabilities		(1.7	)
	$	23.2

The results of STS' operations subsequent to June 14, 2010 have been included in the Company's consolidated results of operations. The acquisition of STS was not significant to the Company's consolidated results of operations for fiscal 2011.

Kleer

On February 16, 2010 SMSC acquired substantially all the assets and certain liabilities of Kleer Corporation and Kleer Semiconductor Corporation (collectively “Kleer”), a designer of high quality, interoperable wireless audio technology addressing headphones and earphones, home audio/theater systems and speakers, portable audio/media players and automotive sound systems. This transaction brings a robust, high-quality audio and low-power radio frequency capability that will allow consumer and automotive OEMs to integrate wireless audio technology into portable audio devices and sound systems without compromising high-grade audio quality or battery life. The majority of Kleer's net assets are located in Luxembourg, and the functional currency of Kleer's operations is the US Dollar. Kleer technology provides a natural extension to SMSC's consumer and automotive connectivity portfolio. This technology extends our ability to service our OEM customers with a broad portfolio of solutions.

The following table summarizes the components of the purchase price at fair value (in millions) :

Cash	$	5.5
Liability for contingent consideration		0.8
	$	6.3

The following table summarizes the allocation of the purchase price at fair value (in millions) :

Cash and cash equivalents	$	0.3
Accounts receivable		0.2
Inventories		0.6
Customer relationships		0.5
Trade name		0.7
Technology		1.8
Goodwill (of which $2.4M is tax-deductible)		2.5
Accounts payable and accrued liabilities		(0.3	)
	$	6.3

The results of Kleer's operations subsequent to February 16, 2010 have been included in the Company's consolidated results of operations. The acquisition of Kleer was not significant to the Company's fiscal 2010 consolidated results of operations.

K2L

On November 5, 2009, the Company (through its wholly-owned subsidiary, SMSC Europe GmbH) completed the acquisition of 100 percent of the outstanding shares of K2L GmbH (“K2L”), a privately held company located in Pforzheim, Germany that specializes in software development and systems integration support services for automotive networking applications, including MOST®-based systems. The majority of K2L's net assets, including goodwill, are located in Germany, and the functional currency of K2L's operations in Germany is the Euro. This acquisition significantly expands SMSC's automotive engineering capabilities by adding an assembled workforce of approximately 30 highly skilled engineers and other professionals, in close proximity to SMSC's current automotive product design center in Karlsruhe, Germany.

The following table summarizes the components of the purchase price (in millions) :

Cash	$	5.9
SMSC common stock (53,236 shares)		1.0
Liability for contingent consideration		2.0
	$	8.9

The following table summarizes the allocation of the purchase price at fair value (in millions) :

Cash and cash equivalents	$	0.6
Accounts receivable		0.8
Inventories		0.1
Other current assets		0.2
Property and equipment		0.3
Customer relationships		1.9
Trade name		0.2
Technology		1.7
Goodwill (all non-deductible for tax purposes)		4.8
Accounts payable and accrued liabilities		(0.4	)
Deferred income		(0.1	)
Deferred tax liabilities		(1.1	)
Other long-term liabilities		(0.1	)
	$	8.9

The results of K2L's operations subsequent to November 5, 2009 have been included in the Company's consolidated results of operations. The acquisition of K2L was not significant to the Company's fiscal 2010 consolidated results of operations.