Amendment No. 1 to Form 8-K

Intrinsic value of options exercised

Total calculated value of options vested

-----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, QgyvcMhS199da1NmpcTeTSHFi63y9l+ClF/k5gV3Mcv8PcapBySMisCcn9O/m5kg uTyy+8An99cCKY+KFj2gaQ== 0001193125-10-037571.txt : 20100223 0001193125-10-037571.hdr.sgml : 20100223 20100223160614 ACCESSION NUMBER: 0001193125-10-037571 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20091209 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20100223 DATE AS OF CHANGE: 20100223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEMTECH CORP CENTRAL INDEX KEY: 0000088941 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 952119684 STATE OF INCORPORATION: DE FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06395 FILM NUMBER: 10626023 BUSINESS ADDRESS: STREET 1: 200 FLYNN ROAD CITY: CAMARILLO STATE: CA ZIP: 93012-8790 BUSINESS PHONE: 8054982111 MAIL ADDRESS: STREET 1: 200 FLYNN ROAD CITY: CAMARILLO STATE: CA ZIP: 93012-8790 8-K/A 1 d8ka.htm AMENDMENT NO. 1 TO FORM 8-K Amendment No. 1 to Form 8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported) December 9, 2009

Semtech Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of Incorporation)


1-6395		95-2119684
(Commission File Number)		(IRS Employer Identification No.)

200 Flynn Road

Camarillo, California

93012-8790

(Address of Principal Executive Offices)

(Zip Code)

805-498-2111

(Registrant’s Telephone Number, Including Area Code)

(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:

¨	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))

Explanatory Note

On December 15, 2009, Semtech Corporation (“Semtech”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Original Form 8-K”) in connection with the completion on December 9, 2009 of the acquisition of all outstanding equity interests of Sierra Monolithics, Inc. (“Sierra Monolithics”).

This Current Report on Form 8-K/A amends Item 9.01 of the Original Form 8-K in order to provide the financial information required by Item 9.01(a) and 9.01(b), which Semtech indicated in the Original Form 8-K would be filed no later than 71 calendar days after the date of the Original Form 8-K.

Item 9.01.

Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired

The unaudited condensed financial statements of Sierra Monolithics, including Sierra Monolithics’ condensed balance sheets as of September 30, 2009 and December 31, 2008, the condensed statements of operations and condensed statements of cash flows for the nine months ended September 30, 2009 and 2008 and the Notes to Condensed Financial Statements, are being filed as Exhibit 99.3 to this Form 8-K/A.

The audited financial statements of Sierra Monolithics, including Sierra Monolithics’ balance sheets as of December 31, 2008 and 2007, the statements of operations, statements of stockholders’ deficit and statements of cash flows for the years ended December 31, 2008 and 2007, the Notes to Financial Statements and the Independent Auditors’ Report, are being filed as Exhibit 99.4 to this Form 8-K/A.

(b) Pro Forma Financial Information

The unaudited pro forma combined condensed financial statements of Semtech, including Semtech’s unaudited pro forma combined condensed balance sheet as of October 25, 2009, statements of operations for the nine months ended October 25, 2009 and the year ended January 25, 2009 and Notes to Unaudited Pro Forma Combined Condensed Financial Statements, giving effect to the acquisition of Sierra Monolithics, are being filed as Exhibit 99.5 to this Form 8-K/A.

(d) Exhibits


Exhibit 2.1 (*)		Agreement and Plan of Merger, dated November 18, 2009, by and among Semtech Corporation, Sierra Monolithics, Inc., SMI Merger Corp. and Shareholder Representative Services. (Incorporated by reference to Exhibit 2.1 to Semtech’s Current Report on Form 8-K filed on December 15, 2009.) (1)

Exhibit 10.1		First Amendment to Agreement and Plan of Merger dated December 9, 2009. (Incorporated by reference to Exhibit 10.1 to Semtech’s Current Report on Form 8-K filed on December 15, 2009.)

Exhibit 23.1		Consent of Independent Auditors.

Exhibit 99.1		Press Release of Semtech Corporation dated December 9, 2009. (This Exhibit 99.1 is being furnished and shall not be deemed “filed” as set forth in Item 7.01 hereof.) (Incorporated by reference to Exhibit 99.1 to Semtech’s Current Report on Form 8-K filed on December 15, 2009.)

Exhibit 99.2		Press Release of Semtech Corporation dated December 11, 2009. (This Exhibit 99.2 is being furnished and shall not be deemed “filed” as set forth in Item 7.01 hereof.) (Incorporated by reference to Exhibit 99.2 to Semtech’s Current Report on Form 8-K filed on December 15, 2009.)


Exhibit 99.3		Unaudited Condensed Financial Statements of Sierra Monolithics as of September 30, 2009 and December 31, 2008 and for the nine months ended September 30, 2009 and 2008.

Exhibit 99.4		Audited Financial Statements of Sierra Monolithics as of, and for the years ended, December 31, 2008 and 2007.

Exhibit 99.5		Unaudited Pro Forma Combined Condensed Financial Statements as of, and for the nine months ended, October 25, 2009, and for the year ended January 25, 2009.

The information contained in Exhibit 99.1 and Exhibit 99.2 hereto is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. The information in Exhibit 99.1 and Exhibit 99.2 hereto shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference to Exhibit 99.1 or Exhibit 99.2 in such filing.

*	The Securities and Exchange Commission has granted confidential treatment with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

(1)	Certain exhibits and schedules to the Merger Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. Semtech will furnish copies of any of the exhibits and schedules to the Securities and Exchange Commission upon request.

SIGNATURE

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


Date: February 23, 2010	SEMTECH CORPORATION

	By:	/s/ EMEKA CHUKWU
		Emeka Chukwu
		Chief Financial Officer

EX-23.1 2 dex231.htm CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the following Registration Statements:

(i)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 033-85156), filed October 14, 1994 with respect to registration of 300,000 shares of the Company’s common stock for the Company’s 1994 Long-Term Stock Incentive Plan;

(ii)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 033-85158), with respect to registration of 100,000 shares of the Company’s common stock for the Company’s 1994 Non-Employee Directors’ Stock Option Plan;

(iii)

the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-00597), filed January 31, 1996 with respect to registration of 400,000 shares of the Company’s common stock for the Company’s 1994 Long-Term Stock Incentive Plan;

(iv)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-00599), filed January 31, 1996 with respect to registration of 150,000 shares of the Company’s common stock for the Company’s 1994 Non-Employee Directors Stock Option Plan;

(v)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-27777) filed May 23, 1997 with respect to registration of 800,000 shares of the Company’s common stock for the 1994-Long Term Stock Incentive Plan;

(vi)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-44033), filed January 9, 1998 with respect to registration of 800,000 shares of the Company’s common stock for the Company’s 1994 Long-Term Stock Incentive Plan;

(vii)

the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-80319), filed June 9, 1999 with respect to registration of 2,150,868 shares of the Company’s common stock for the Company’s Long-Term Stock Incentive Plan;

(viii)

the Registration Statement on Form S-3 of Semtech Corporation (File No. 333-95183), filed January 21, 2000 with respect to registration of 495,403 shares of the Company’s common stock in conjunction with the acquisition of USAR Systems, Incorporated;

(ix)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-50448) filed November 22, 2000 with respect to registration of 4,000,000 shares of the Company’s common stock for the Company’s Non-Director and Non-Executive Officer Long-Term Stock Incentive Plan;

(x)

the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-60396) filed May 8, 2001 with respect to registration of 4,000,000 shares of the Company’s common stock for the Company’s Non-Director and Non-Executive Officer Long-Term Stock Incentive Plan and 200,000 shares of the Company’s common stock for Non-Statutory Stock Option Grants made to Directors in December 1997;

(xi)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-118802) filed September 3, 2004 with respect to registration of 550,000 shares of the Company’s common stock for Non-Qualified Stock Option Grants made to certain executive officers in November 2002 and April 2004;

(xii)

the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-118804) filed September 3, 2004 with respect to registration of 4,902,200 shares of the Company’s common stock for the Company’s Long-Term Stock Incentive Plan;

(xiii)

the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-142151) filed April 16, 2007 with respect to registration of 3,097,800 shares of the Company’s common stock for the Company’s Long-Term Stock Incentive Plan;

(xiv)

the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-142153) filed April 16, 2007 with respect to registration of 600,000 shares of the Company’s common stock for Non-Qualified Stock Option Grants and Restricted Stock Awards to Chief Executive Officer Maheswaran;

(xv)	the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-152939) filed August 11, 2008 with respect to registration of 11,791,337 shares of the Company’s common stock for the Company’s 2008 Long-Term Equity Incentive Plan; and

(xvi)

the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-163780) filed December 16, 2009 with respect to registration of 796,661 shares of Semtech’s common stock for Semtech’s 2009 Long-Term Equity Inducement Plan, 266,020 shares of Semtech’s common stock for Semtech’s 2000 SMI Assumed Plan and 683,205 shares of Semtech’s common stock for Semtech’s 2007 SMI Assumed Plan

of our report dated April 24, 2009, relating to the financial statements of Sierra Monolithics, Inc. appearing in this Current Report on Form 8-K/A of Semtech Corporation dated February 22, 2010.

/s/ Deloitte & Touche LLP

Los Angeles, CA

February 22, 2010

EX-99.3 3 dex993.htm UNAUDITED CONDENSED FINANCIAL STATEMENTS OF SIERRA MONOLITHICS Unaudited Condensed Financial Statements of Sierra Monolithics

Exhibit 99.3

Sierra Monolithics, Inc.

Condensed Financial Statements (Unaudited) as of September 30, 2009 and December 31, 2008 and for the Nine Months ended September 30, 2009 and 2008

SIERRA MONOLITHICS, INC.

TABLE OF CONTENTS


CONDENSED FINANCIAL STATEMENTS (UNAUDITED) AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008:

Balance Sheets		3–4

Statements of Operations		5

Statements of Cash Flows		6

Notes to Condensed Financial Statements		7–22

SIERRA MONOLITHICS, INC.

CONDENSED BALANCE SHEETS (UNAUDITED)

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


	September 30, 2009		December 31, 2008
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	5,325,476	$	3,941,243
Accounts receivable — net of allowance for doubtful accounts and sales return reserves of $477,815 as of September 30, 2009, and $565,377 as of December 31, 2008		7,426,599		4,057,842
Contract receivables		409,332		1,346,046
Inventory		4,589,046		6,910,819
Deferred income tax assets		2,852,551		6,079,217
Other current assets		595,388		369,037

Total current assets		21,198,392		22,704,204

PROPERTY AND EQUIPMENT — Net		3,981,914		3,329,852

DEFERRED INCOME TAX ASSETS		4,996,474		3,499,858

OTHER ASSETS		50,022		50,023

TOTAL	$	30,226,802	$	29,583,937

(Continued)

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SIERRA MONOLITHICS, INC.

CONDENSED BALANCE SHEETS (UNAUDITED)

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


	September 30, 2009			December 31, 2008
LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES:
Accounts payable	$	2,314,361		$	2,095,756
Accrued expenses		3,317,475			3,995,703
Warranty obligation		2,790,609			5,064,660
Deferred revenue		27,872			16,380
Deferred rent		66,157			—
Advanced payments and billings in excess of costs incurred		690,000			83,000
Current portion of credit facility		1,166,666			1,666,666
Current portion of obligations under capital leases		15,773			106,477
Customer advances		136,182			144,185
Income tax payable		—			71,336

Total current liabilities		10,525,095			13,244,163

LONG-TERM LIABILITIES:
Long-term portion of credit facility		1,572,579			1,333,334

Total liabilities		12,097,674			14,577,497

COMMITMENTS AND CONTINGENCIES (Note 11)

CONVERTIBLE SERIES A PREFERRED STOCK, $0.0001 PAR VALUE — Authorized, 10,039,783 shares; issued and outstanding, 9,838,290 and 9,838,290 shares on September 30, 2009 and December 31, 2008, respectively		22,948,579			22,948,579

CONVERTIBLE SERIES B PREFERRED STOCK, $0.0001 PAR VALUE PER SHARE — Authorized, issued, and outstanding, 21,138,211 shares		17,733,104			17,733,104

STOCKHOLDERS’ DEFICIT:
Common stock and additional paid-in capital, $0.0001 par value per share — authorized, 100,000,000 shares; issued and outstanding, 13,665,879 and 13,633,251 shares on September 30, 2009 and December 31, 2008, respectively		1,349,595			761,390
Accumulated deficit		(23,902,150	)		(26,436,633	)

Total stockholders’ deficit		(22,552,555	)		(25,675,243	)

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	30,226,802		$	29,583,937


See notes to unaudited condensed financial statements		(Concluded)

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SIERRA MONOLITHICS, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


	Nine months ended
	September 30, 2009			September 30, 2008
REVENUES	$	37,086,532		$	35,312,345
COSTS OF REVENUES		16,123,809			15,603,900

GROSS PROFIT		20,962,723			19,708,445
RESEARCH AND DEVELOPMENT COSTS		10,334,111			8,008,345
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES		6,033,132			5,739,562

OPERATING INCOME		4,595,480			5,960,538
INTEREST INCOME		7,987			67,794
INTEREST EXPENSE		(130,784	)		(66,781	)

INCOME BEFORE INCOME TAXES		4,472,683			5,961,551
INCOME TAX (EXPENSE) BENEFIT		(1,938,205	)		9,620,741

NET INCOME	$	2,534,478		$	15,582,292

See notes to unaudited condensed financial statements

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SIERRA MONOLITHICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


	Nine months ended
	September 30, 2009			September 30, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	2,534,478		$	15,582,292
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,295,292			794,464
Stock-based compensation		581,730			326,717
Provision for (recoveries of) uncollectible accounts receivable and net sales returns		(87,561	)		(377,510	)
Deferred income taxes		1,730,050			(9,889,346	)
Changes in operating assets and liabilities:
Accounts receivable		(3,281,196	)		277,358
Contract receivables		936,714			(150,976	)
Inventory		2,321,773			(4,999,243	)
Other current assets		(240,916	)		285,139
Other assets		—			81,000
Accounts payable		218,605			92,385
Accrued expense and deferred rent		(612,067	)		431,042
Warranty obligation		(2,274,051	)		(2,293,051	)
Deferred revenue		11,492			(466,660	)
Advanced payments and billings in excess of costs incurred		607,000			55,541
Income tax payable		(71,336	)		(43,693	)
Customer advances		(8,003	)		(50,816	)

Net cash provided by (used in) operating activities		3,662,004			(345,357	)

CASH FLOWS USED IN INVESTING ACTIVITIES - Purchase of property and equipment		(1,932,786	)		(2,696,348	)

CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under credit facility		—			—
Repayments under credit facility		(1,000,000	)		—
Borrowing under equipment facility		1,500,000			2,000,000
Repayments under equipment facility		(760,756	)		—
Repayments on obligations under capital lease		(90,704	)		(75,818	)
Proceeds from exercise of options		6,475			42,115

Net cash (used in) provided by financing activities		(344,985	)		1,966,297

NET INCREASE (DECREASE) IN CASH		1,384,233			(1,075,408	)
CASH - Beginning of period		3,941,243			2,940,219

CASH - End of period	$	5,325,476		$	1,864,811

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION — Cash paid during the year for:
Interest	$	116,217		$	63,481

Income taxes	$	166,500		$	128,000

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchases in accounts payable	$	0		$	152,893

See notes to unaudited condensed financial statements

- 6 -

SIERRA MONOLITHICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

1.	ORGANIZATION AND BASIS OF PRESENTATION

Nature of Business — Sierra Monolithics, Inc. (the “Company”) designs and manufactures wireless chipsets and high-speed integrated circuits for optical networking applications, including 10, 40, and 100 gigabit per second systems, focusing on physical layer and physical-media dependent chipsets. The Company also provides high-performance microwave modules for wireless communication systems. The Company is headquartered in Irvine, California.

Basis of Presentation — These statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2008. The Company has evaluated subsequent events through February 21, 2010, the date these unaudited condensed financial statements were issued.

The accompanying consolidated condensed financial statements have been prepared without audit and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

Liquidity — The Company may encounter certain risks such as the possible inability to respond to changes in a rapidly evolving, unpredictable business environment and the inability to manage growth effectively. The Company must, among other things, develop its products to meet customer needs, successfully implement its business and marketing strategies, and provide superior customer service. If the Company is not successful in addressing such risks, it will be adversely affected.

A significant amount of the Company’s cash is generated by sales of its products to a few customers. The Company is also developing products for emerging markets. If any of the customers significantly reduce their orders, or should these emerging markets not grow as anticipated, this could severely impact the Company’s cash flows.

The Company’s internal research and development activities to date, have been funded by sales of its preferred and common stock, product sales, and development contracts. As of September 30, 2009, the Company had cash and cash equivalents of $5,325,476. Based on the Company’s projected operating cash flows for 2009 and 2010, management believes that it has sufficient cash resources to fund operations and meet its obligations as they become due for the next 12 months. There can be no assurance that the Company will be able to raise additional capital, as needed, which could have a material adverse affect on the Company’s business, financial condition, or results of operations. The Company’s prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets.

- 7 -

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition for Product Sales — The Company recognizes revenue on products when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectability is reasonably assured. Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data.

Revenues from distributors are recognized when products are sold to third-party customers as distributors have the right of return. Until products are sold to the ultimate customer, certain amounts are included within accounts receivable and deferred revenue.

Revenue Recognition for Product Design Contracts — The Company enters into arrangements for the design of complex integrated circuits with contractors providing products primarily to the U.S. government. The Company accounts for its contracts in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 605-35, “Revenue Recognition – Construction-Type and Certain Production-Type Contracts”. The Company recognizes revenue when it has persuasive evidence of an arrangement with a customer, which is upon entry by the Company and the customer into a legally enforceable agreement. In accounting for the contracts, the Company utilizes the cost-to-cost method of percentage-of-completion accounting in accordance with ASC 605-35. Revenues include amounts that can be reasonably assured and reasonably estimated. Amounts that cannot be reasonably assured and reasonably estimated are excluded from revenue until such time that a reasonable estimate can be made and the receipt of such amounts is reasonably assured. Under this method, revenues, including estimated earned fees or profits, are recorded as costs are incurred. Revenues are calculated based on the percentage of total costs incurred compared to total estimated costs at completion. Contract costs include direct materials, direct labor costs, and other direct costs related to contract performance. These costs are included in costs of revenues.

Revenue under development agreements is recognized when applicable contractual milestones have been met, including deliverables, and in any case, does not exceed the amount that would be recognized using the percentage-of-completion method in accordance with ASC 605-35. The costs associated with development agreements are included in cost of revenue.

Product design contracts are performed to the customers’ specifications. The contracts contain objective specifications that relate to the technical requirements for the product design to be delivered to the Company’s customers. The contracts contain production schedules setting forth a timeline for production and a final delivery date for the completed product design and related prototypes.

Billing practices for percentage-of-completion contracts are governed by the contract terms, based upon costs incurred, achievement of milestones, or agreed-upon schedules. Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. Advanced payments and billings in excess of costs and estimated earnings are recorded as a liability in the accompanying condensed balance sheets. When billings are less than recognized revenue, the difference is recorded as unbilled receivables. Total unbilled receivables as of September 30, 2009 and December 31, 2008, are $83,000 and $638,000, respectively.

- 8 -

cannot be reasonably assured and reasonably estimated are excluded from revenue until such time that a reasonable estimate can be made and the receipt of such amounts is reasonably assured. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Changes in estimates of contract revenue, costs, and profits are recognized in the current period based on the cumulative effect of the changes on current and prior periods. Hence, the effect of the changes on future periods of contract performance is recognized as if the revised estimates had been the original estimates. A significant change in one or more projects could have a material adverse affect on the Company’s condensed financial position or results of operations.

Rebates for Product Sales — The Company has two customers where product is shipped and sold directly to the customer’s contract manufacturer. The two customers are then paid a rebate based on the volume sold to their contract manufacturer. In addition, the Company has three customers where product is shipped and sold directly to the customer. The three customers are then paid a rebate based on sales volume. Revenue is recorded net of such rebates.

Cash and Cash equivalents — The Company considers short-term investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Accounts Receivable — Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses related to the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience. Past due balances over 60 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventory — Inventory is stated at the lower of cost or market using the first-in, first-out method.

Property and Equipment — Property and equipment are stated at cost. Equipment under capital leases is stated initially at the lower of the present value of minimum lease payments at the lease inception or fair value. Depreciation of property and equipment is calculated on the straight-line method over the estimated useful lives of the assets, generally ranging from three to seven years. Leasehold improvements are amortized over the shorter of the useful life of the related asset or the lease term. Total depreciation and amortization expense for the nine months ended September 30, 2009 and 2008, was $1,280,725 and $791,163, respectively.

Software Cost — The Company has capitalized certain costs for the development of internal use software under the guidelines of ASC 350-40, “Intangibles – Goodwill and other Internal-Use Software.” The net carrying value of software capitalized for internal use as of September 30, 2009 and December 31, 2008, was $442,649 and $574,018, respectively. Amortization of capitalized software is calculated on the straight-line method over the estimated useful life, which has been determined to be three years.

Impairment of Long-Lived Assets — In accordance with ASC 360 – “Property, Plant, and Equipment”, long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment charges were recorded for long-lived assets during the nine months ended September 30, 2009 and 2008.

- 9 -

Research and Development Costs — Research and development costs related to the internal design, development, and testing of new systems, applications, and technologies are charged to expense as incurred. Total research and development costs for the nine months ended September 30, 2009 and 2008, were $10,334,111 and $8,008,345, respectively.

Advertising Costs — Advertising costs are expensed when incurred and are included in selling, general, and administrative expenses. Total advertising costs for the nine months ended September 30, 2009 and 2008, were $77,281 and $65,506, respectively.

Stock Option Plan — The Company has an employee stock option plan, which is described more fully in Note 8. The Company accounts for stock-based awards in accordance with ASC 718 “Compensation – Stock Compensation”.

Financial Instruments and Concentration of Credit and Business Risk — Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company maintains cash balances with a financial institution located in California. At times, the cash balances exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk in this area.

The Company had two vendors, which represented approximately 24.8% and 14.3% of inventory purchases during the nine months ended September 30, 2009. The Company had two vendors, which represented approximately 30.6% and 26.8% of inventory purchases during the nine months ended September 30, 2008.

The Company had sales to three customers, which represented approximately 20.3%, 17.4%, and 12.9% of revenues, respectively, during the nine months ended September 30, 2009, and approximately 21.0%, 16.9%, and 12.8% of revenues, respectively, during the nine months ended September 30, 2008. Additionally, the Company had sales to three customers, which represented approximately 28.1%, 15.6%, and 10% of accounts receivable, respectively, as of September 30, 2009, and approximately 22.6%, 15.2%, and 8.1% of accounts receivable, respectively, as of December 31, 2008.

Use of Estimates — The preparation of the condensed financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the bad debt allowance, inventory obsolescence, stock-based compensation, and deferred income tax assets, as well as estimates of revenue and expenses under long-term contracts and potential warranty claims. Actual results could differ from those estimates.

Provision for Warranties — The Company offers its customers warranties on most products sold to them. These warranties typically provide for repairs or replacement for a specified time period. Concurrent with the sale of products, a provision for estimated warranty expense is recorded with a corresponding increase in costs of revenues. This provision is adjusted periodically based on historical and anticipated experience. Actual costs of repairs under warranty, including parts and labor, are charged to this provision when incurred. The Company had an accrued warranty obligation related to a specific warranty issue of $2,625,000 and $4,964,284 as of September 30, 2009 and December 31, 2008, respectively. The specific warranty issue relates to a potential reliability issue with a particular product when used over an extended period of time.

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Warranty activity for the nine months ended September 30, 2009 and 2008, is as follows


Balance — January 1, 2008	$	7,987,434

Additions		32,660
Reductions for warranty costs		(2,325,841	)

Balance — September 30, 2008	$	5,694,253

Balance — January 1, 2009		5,064,660

Additions		88,345
Reductions for warranty costs		(2,362,396	)

Balance — September 30, 2009	$	2,790,609

Customer Advances — In 2007, a customer paid $192,600 to the Company for the development of a specific product. The customer advance has been recognized as a $2.00 per unit credit as parts are shipped to the customer. The balance with the customer as of September 30, 2009 and December 31, 2008 was $122,700 and $137,000, respectively. Certain other customers paid in advance for certain products during 2009 and 2008 and represent balances of $13,482 and $7,185 as of September 30, 2009 and December 31, 2008, respectively.

Income Taxes — The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. Under ASC 740, deferred tax assets or liabilities are computed based upon the differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rate. Deferred income tax expense or benefit is based upon the changes in the assets or liability from period to period. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

Recent Accounting Pronouncements — In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing the “more-likely-than-not” recognition threshold that a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, financial statement classification, and disclosures. FIN No. 48 was effective for fiscal years beginning after December 15, 2006. On December 30, 2008, the FASB issued FASB Staff Position (FSP) FIN No. 48-3, “Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises”, which defers the effective date of FIN No. 48 for certain nonpublic enterprises to annual periods beginning after December 15, 2008. The Company has adopted FIN No. 48 based upon the provisions of FSP FIN No. 48-3, with no material impact on the Company’s condensed financial position and results of operations.

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3.	CONTRACT RECEIVABLES

Contract receivables as of September 30, 2009 and December 31, 2008, consists of the following:


	2009		2008
Contract receivables:
Billed contract receivables	$	326,332	$	708,046
Unbilled receivables		83,000		638,000

	$	409,332	$	1,346,046

Billed contracts in process do not have retentions arising from contractual provisions. In addition, no claims are present in amounts billed as of September 30, 2009 and December 31, 2008. The Company expects its billed contract receivables balance to be collected within the next 12 months.

4.	INVENTORY

Inventory as of September 30, 2009 and December 31, 2008, consists of the following:


	2009		2008
Raw materials	$	2,141,270	$	2,797,757
Work in progress		1,245,852		2,345,806
Finished goods		1,201,924		1,767,256

	$	4,589,046	$	6,910,819

5.	PROPERTY AND EQUIPMENT

Property and equipment as of September 30, 2009 and December 31, 2008, is summarized as follows:


	2009			2008
Office equipment	$	450,669		$	289,674
Engineering equipment		4,843,581			3,785,097
Computer equipment		2,177,008			1,751,841
Leasehold improvements		397,322			139,701
Leased engineering test equipment		331,046			331,046

		8,199,626			6,297,359
Less accumulated depreciation and amortization		(4,217,712	)		(2,967,507	)

	$	3,981,914		$	3,329,852

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An analysis of the leased property under capital leases by major classes as of September 30, 2009 and December 31, 2008, is as follows:


	2009			2008
Engineering test equipment	$	331,046		$	331,046
Less accumulated depreciation		(331,046	)		(248,284	)

	$	—		$	82,762

6.	CREDIT FACILITY

In August 2005, the Company entered into a credit agreement with a lender that allowed the Company to borrow up to 80% of eligible accounts receivables, as defined in the agreement. Under the credit facility the aggregate face amount of the financed receivables outstanding at any time could not exceed $6,250,000, and the bank had no obligation to make total advances in excess of $5,000,000. Advances due under the credit facility as of December 31, 2008 were $1,000,000. On February 4, 2009, the Company amended the terms of this credit agreement with the lender. The aggregate face amount of the financed receivables was reduced from $6,250,000 to $5,312,500, and the maximum advances were reduced from $5,000,000 to $4,250,000. The line of credit was extended to July 24, 2010. Available borrowings under the credit facility as of September 30, 2009 were $4,250,000.

In July 2008, the Company also entered into a $2,000,000 equipment facility with the same lender secured by capital equipment purchased using the proceeds from the facility. The interest rate is prime, plus 0.5%. Repayment is based on 36 consecutive equal monthly installments beginning in January 2009 and continuing until December 2011. The Company had drawn down $2,000,000 under the equipment facility as of September 30, 2009, and December, 31 2008.

On February 4, 2009, the Company entered into an additional, $1,500,000 equipment facility with the same lender. The interest rate is prime, plus 2%. Repayment is based on 36 consecutive equal monthly installments commencing with the first day of the month following the advance. As of September 30, 2009, the Company had borrowed $1,500,000 against this facility.

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7.	INCOME TAXES

The provision for income tax for the nine months ended September 30, 2009, and 2008, consisted of the following:


	2009		2008
Current:
Federal	$	64,296	$	75,498
State		143,860		193,107

		208,156		268,605

Deferred:
Federal		1,215,603		1,531,033
State		237,605		(477,624	)

		1,453,208		1,053,409

Valuation allowance		276,841		(10,942,755	)

Total income tax (benefit) provision	$	1,938,205	$	(9,620,741	)

Income tax expense for the nine months ended September 30, 2009 and 2008 differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income as a result of the following:


	2009			2008
Computed “expected” tax expense	$	1,520,713		$	2,026,927
Increase (decrease) in income taxes resulting from change in the valuation allowance for deferred tax assets		276,841			(10,942,755	)
State income tax benefit — net of federal income taxes		251,767			(187,781	)
Research and development credits		(618,708	)		(742,410	)
Other		507,592			225,278

	$	1,938,205		$	(9,620,741	)

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The tax effects of temporary difference that give rise to significant portions of deferred tax assets as of September 30, 2009 and December 31, 2008, are as follows:


	2009			2008
Deferred tax assets:
Net operating loss carryforwards	$	3,512,326		$	5,532,363
Accrued expenses		446,452			208,928
Allowance and reserves		2,103,117			2,587,031
Tax credits carryforwards		2,662,800			1,847,461
State taxes		48,913			69,739
Other		733,972			379,429

		9,507,580			10,624,951

Deferred tax liabilities:
Deferred revenue					(46,487	)
State Taxes		(728,830	)		(809,616	)
Other		(652,884	)		(189,773	)

		(1,381,714	)		(1,045,876	)
Less valuation allowance		(276,841	)

Net deferred taxes	$	7,849,025		$	9,579,075

ASC 740, requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of September 30, 2009, the Company evaluated the positive and negative evidence regarding the future realization of the deferred tax assets. Pursuant to this evaluation, the Company concluded that a valuation allowance against its federal and state capital loss carryforwards should be recorded. The Company believes it is more likely than not that its other deferred tax assets will be realized in future years.

As of September 30, 2009, the Company has net operating loss carryforwards for federal and state income tax purposes of $9,117,198 and $9,059,693 which are available to offset future taxable income, if any, through 2028 and 2016, respectively. The Company experienced a change in ownership in fiscal year 2002, accordingly, in accordance with Internal Revenue Code Section 382, the annual utilization of net operating loss carryforwards existing prior to a change in control of the Company are limited. The federal net operating loss carryforwards includes $4,425,143 which is subject to certain annual limitations of $1,353,633 under the Internal Revenue Code Section 382. As of September 30, 2009, the Company had research and development tax credits for federal and state income tax purposes of $2,322,558 and $1,773,552.

Effective January 1, 2009, the Company adopted authoritative guidance issued by the FASB on accounting for uncertainty in income taxes. This guidance prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company did not recognize any material net adjustment in its liability for unrecognized income tax benefits upon adoption of this guidance, including any amounts for interest and penalties.

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The Company had cumulative unrecognized tax benefits of $1.0 million as of January 1, 2009. As a result of the Company’s historical net operating losses from inception through the date of adoption, the unrecognized tax benefits do not result in any cumulative effect to retained earnings, and if recognized, would affect deferred income taxes.

A reconciliation of the beginning and ending amount of unrecognized tax benefit related to deferred tax assets are as follows:


Balance as of January 1, 2009	$	1,028,690
Increases in unrecognized tax positions		1,015,618

Balance as of September 30, 2009	$	2,044,308

The balance of unrecognized tax benefits at September 30, 2009, if recognized, would affect the effective tax rate. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company files federal and state tax returns in multiple jurisdictions. As of September 30, 2009 the Company is subject to examination by federal taxing authorities for the 2007 and 2008 tax years. The Company does not believe that it is reasonably possible that a decrease in unrecognized tax benefits related to temporary federal and state tax positions may occur within the next 12 months.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2009, no material interest or penalties were accrued due to significant net operating loss carryforwards.

Additionally, as a result of the adoption of FASB Statement No. 123(R), the Company recognizes tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards relating to stock option deductions occurring from January 1, 2006, onward. A tax benefit occurs when the actual tax benefit realized upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award.

8.	STOCK-BASED COMPENSATION

During 2000, the Company’s board of directors approved the 2000 Stock Incentive Plan (the “2000 Plan”), which provides for grants of incentive stock options and nonqualified stock options. Under the 2000 Plan, options may be granted from time to time for an aggregate of no more than 11,474,631 shares of common stock as determined by the board of directors. During 2007, the Company’s board of directors approved the 2007 Stock Incentive Plan (the “2007 Plan”), which provides for grants of incentive stock options and unqualified stock options. Under the 2007 Plan, options may be granted from time to time for an aggregate of no more than 3,000,000 shares of common stock as determined by the board of directors.

The vesting period and exercise dates are determined on an individual case basis by the board of directors, but generally vest 25% at the end of the first year and monthly thereafter over the total four-year period. Exercise of an option may be conditioned upon performance criteria or other reasonable conditions such as term of employment. The options are exercisable up to 10 years from the date of grant.

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Stock-based compensation has been recorded in the condensed statement of operations (unaudited) for the nine months ended September 30, 2009 and 2008, as follows:


	2009		2008
Cost of revenues	$	102,531	$	26,672
Research and development costs		207,010		115,329
Selling, general, and administrative		272,189		184,716

Stock-based compensation before taxes		581,730		326,717
Related income tax benefit		—		—

Stock-based compensation — net of estimated taxes	$	581,730	$	326,717

At September 30, 2009, there were 1,634,512 additional shares available for grant under the Plan.

Under the provisions of FASB ASC 718, the weighted-average fair value of each option grant for the nine months ended September 30, 2009 and 2008, has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	2009		2008
Interest rate (risk free)	1.40	%	2.42	%
Volatility	62.0		50.0
Expected dividends	0.0		0.0
Expected life of option	6.2 years		6.2 years

Using these assumptions, the weighted-average fair value of each stock option granted was $0.60 and $0.54 per share for the nine months ended September 30, 2009 and 2008, respectively. Expected volatilities were based on a volatility factor computed based upon an external peer group analysis of publicly traded companies based in the United States within a predetermined market capitalization range (“public comparables”). The analysis provided historical and implied volatilities of the public comparables and developed an estimate of expected volatility for the Company. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company has not historically paid dividends, thus no dividends are expected. The Company determined the 2009 and 2008 expected term assumptions under the “Simplified Method” as defined in ASC 718, as it lacks historical data and is unable to make reasonable expectations regarding future exercise patterns.

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The total intrinsic value of the options exercised and the total calculated value of the options vested for the nine months ended September 30, 2009 and 2008, are as follows:

Options outstanding that were issued after January 1, 2006, that are expected to vest are net of estimated future option forfeitures in accordance with the provisions of ASC 718. As of September 30, 2009, there was approximately $1.7 million of unrecognized compensation cost related to stock options granted after January 1, 2006. The unrecognized compensation cost is expected to be recognized over the relevant vesting period.

Summary stock option activity during the periods indicated is as follows:


	Number of Options		Weighted- Average Exercise Price		Remaining Contractual Term (In Years)
Outstanding — January 1, 2008	10,176,108		$	0.37

Granted	2,509,000			1.34
Exercised	(98,140	)		0.43
Canceled	(128,000	)		0.20

Outstanding — September 30, 2008	12,458,968		$	0.57

Outstanding — January 1, 2009	12,508,843			0.58

Granted	1,260,253			1.39
Exercised	(32,628	)		0.21
Canceled	(910,333	)		1.16

Outstanding — September 30, 2009	12,826,135		$	0.62	6.19

Vested and expected to vest — September 30, 2009	10,772,335		$	0.60	6.00

Exercisable — September 30, 2009	6,921,874		$	0.33	4.46

- 18 -

A summary of stock option information as of September 30, 2009, is as follows:


	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number of Options	Weighted- Average Exercise Price		Number of Options	Weighted- Average Exercise Price
$ 0.00 – 0.50	7,098,210	$	0.19	5,012,160	$	0.17
0.51 – 1.00	1,774,425		0.69	1,685,467		0.61
1.01 – 3.00	3,953,500		1.35	224,247		1.27

	12,826,135			6,921,874

9.	STOCKHOLDERS’ EQUITY

Authorized Shares — As of September 30, 2009 and December 31, 2008, the Company’s Amended and Restated Articles of Incorporation (“Articles”) authorize the issuance of shares designated as common stock and preferred stock, each having a par value of $0.0001 per share. As of September 30, 2009 and December 31, 2008, the shares of common stock and preferred stock authorized were 100,000,000 and 31,177,994, respectively.

Of the 31,177,994 preferred shares authorized, 10,039,783 are designated as Series A redeemable convertible preferred stock and 21,138,211 are designated as Series B redeemable convertible preferred stock.

Redeemable Convertible Preferred Stock — On November 20, 2000, the Company issued 1,314,666 shares of Series A preferred stock. In January 2001 and April 2001, the Company issued 8,019,456 and 350,701 shares of Series A preferred stock, respectively. On May 28, 2002, the Company issued 21,138,211 shares of Series B preferred stock for $12,979,134.

Significant rights, preferences, and privileges of the Series A and Series B preferred stock as of September 30, 2009 and December 31, 2008, are listed below.

Conversion Rights — Each share of the preferred stock outstanding is convertible, at the option of the holder, into common stock at a conversion rate determined by dividing (i) $1.5213 in the case of Series A preferred stock and (ii) $0.615 in the case of Series B preferred stock by the conversion price (as defined in the Company’s Articles) applicable to such share in effect on the date that the certificate is surrendered for conversion. The initial conversion price for the Series A preferred stock is $1.189 and $0.615 for the Series B preferred stock. Such initial conversion price is subject to adjustment for certain dilutive issuances, splits, and combinations (as defined in the Company’s Articles).

Such conversion will occur automatically upon the earlier of (i) at the option of a holder, immediately prior to the closing of a registered public offering of the Company’s common stock that yields aggregate proceeds to the Company of at least $25,000,000 at a per share price of at least $3.50 or (ii) the date specified by written consent of the holders of a majority of the then outstanding shares of Series A preferred stock and Series B preferred stock, voting together as a class.

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Dividend Rights — No dividends shall be declared or paid to any holders of shares of the common stock of the Company unless and until a dividend of (i) $0.121704 per share of preferred stock per year has first been declared and paid to the holders of the shares of Series A preferred stock and (ii) $0.0492 per share of preferred stock per year has first been declared and paid to the holders of the shares of Series B preferred stock, payable quarterly when as and if declared by the board of directors. Such dividends are not cumulative.

Liquidation Preference — (1) In the event of a liquidation, dissolution, or winding-up of the Company, the holders of Series A and Series B preferred stock are entitled to receive proportionally a liquidation preference of up to (A) $1.5213 per share for each share of Series A preferred stock then held by them and (B) $0.615 per share for each of Series B preferred stock then held by them, plus declared but unpaid dividends based on the amount of the available assets. Any remaining assets are to be distributed (i) first, among the holders of the Series A and Series B preferred stock and the common stock pro-rata based on the number of shares of common stock held by each (assuming conversion) until the holders of (a) the Series B preferred stock receive up to an aggregate of $1.845 per share of Series B preferred stock (including amounts paid under (1)); (b) next, if assets remain in the Company, the holders of Series A preferred stock receive up to an aggregate of $4.5639 per share of Series A preferred stock (including amounts paid under (1)); (ii) next, if assets remain in the Company, the holders of the common stock will receive up to an aggregate of $4.5639 per share (including amounts paid under (a) and (b)); and (iii) thereafter, any remaining assets are to be distributed among the holders of the Series A and Series B preferred stock and the common stock pro rata on an as if converted basis.

Deemed Liquidation — A liquidation, dissolution, or winding-up of the Company shall be deemed to occur if the Company shall sell, convey, or otherwise dispose of all or substantially all of its property or business or merge with or into or consolidate with any other corporation (other than a wholly owned subsidiary corporation) in which the stockholders of the Company own less than 50% of the voting power of the surviving corporation following the transaction. As a result, the Company does not control whether the redeemable convertible preferred stock may be redeemed in connection with such deemed liquidation and has, therefore, classified such preferred stock outside of permanent equity on the accompanying condensed balance sheets.

Voting Rights — Holders of preferred stock are generally entitled to vote together with holders of common stock on matters presented for stockholder action as if such shares were converted to common stock.

Redemption Rights — During the one-year period beginning on May 20, 2005, had the Company received a written request from the holders owning at least a majority of the then outstanding shares of Series A and Series B preferred stock that at least a majority of the outstanding shares of such series held by them be redeemed, then the Company would have been requested to redeem the number of shares specified in the redemption election. The redemption price would have been the greater of the then fair market value of common stock as if converted or (i) $1.5213 per share of Series A preferred stock and (ii) $0.615 per share of Series B preferred stock (as adjusted for any stock dividends, combinations, or splits), plus interest at a rate of 8.0% per year, compounded semiannually. The Company accreted interest on the preferred stock over the period that began on the issuance date and ended on May 19, 2006, the expiration of the redemption option. The one-year period ending May 19, 2006, expired without the stockholders making the election to redeem their shares of preferred stock. Thus, the Series A and Series B preferred stock is no longer redeemable at the stockholders’ request.

- 20 -

Warrants — In 2001, the Company entered into an equipment loan with Venture Lending & Leasing III Inc. and 354,960 warrants for the Company’s series A preferred stock were issued as part of the consideration for the equipment loan. The exercise price for the warrants was $1.5213. The warrants were exercised on September 14, 2008.

10.

RETIREMENT BENEFIT PLAN

Under the Company’s 401(k) profit-sharing plan, employees may elect to have a portion of their compensation deferred and contributed to their 401(k) accounts. Employee contributions vest immediately. The Company may make discretionary matching contributions to the plan that are allocated to the plan participants based on each participant’s proportional deferral of the total employee deferrals in a plan year. An additional annual contribution may be made at the discretion of the Company’s board of directors. No employer contributions were made to the plan during the nine months ended September 30, 2009 and 2008.

11.

COMMITMENTS AND CONTINGENCIES

Warranty Obligation — The Company recorded a warranty obligation related to defects discovered within the 40 gigabit per second serializer and deserializer devices used for optical communication applications as a result of an issue within the manufacturing process. This defect is evident when the devices were used over an extended period of time. The Company has changed the manufacturing process associated with this integrated circuit and performed testing which indicated no further defect. Management determined that it is both probable that a loss exists and that the amount of loss can be reasonably estimated. Management estimates that the exposure related to the replacement and potential settlement with certain customers is $2,625,000 and $4,964,284 as of September 30, 2009 and December 31, 2008, respectively. Management expects settlement to be in the form of replacement product as well as compensation for damages paid in cash, and reductions of previously negotiated prices. Based on the current status of the Company’s settlement negotiations with its impacted customers, management believes that a material loss in excess of amounts provided is not reasonably possible.

Capital Leases — During fiscal year 2006, the Company leased equipment under various capital lease obligations which expired in 2009.

Operating Leases — The Company leases certain equipment and office facilities under operating leases. Total rent expense was approximately $1,045,993 and $1,201,538 for the periods ended September 30, 2009 and 2008, respectively.

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Future noncancelable minimum commitments under operating leases as of September 30, 2009, are as follows:


Years Ending September 30,
2009	$	211,087
2010		522,757
2011		383,214
2012		401,466
2013		419,712
Thereafter		214,216

	$	2,152,452

In March 2009, the Company signed a five-year lease for a 15,207 square feet building for additional manufacturing, development, and administration facilities. The total lease payments over five years will be $1,902,396.

Governmental Services — As the Company provides services to various government agencies, it is subject to retrospective audits, which may result in adjustments to previously recorded revenues, and the Company may be subject to investigation by governmental entities. Failure to comply with the terms of any governmental contract could result in civil and criminal fines and penalties, as well as suspension from future government contracts. The Company is not aware of any adjustments, fines, or penalties that could have a material adverse affect on its condensed financial position, results of operations, or liquidity.

Software License — During 2008, the Company entered into a $1,600,000 licensing contract with a software vendor for the use of software. The contract requires eight installments beginning April 2008 through January 2010. $600,000 was paid in 2008. Required payments under this contract are $800,000 in 2009 and $200,000 in 2010. In 2008, the Company entered into another $200,000 licensing contract with this software vendor. The contract requires eight installments beginning October 2008 through July 2010. $25,000 was paid in 2008. Future payments under this contract are $100,000 in 2009 and $75,000 in 2010.

Subsequent Events — On December 9, 2009, Semtech Corporation (NASDAQ:SMTC) completed the acquisition of the Company.

* * * * * *

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EX-99.4 4 dex994.htm AUDITED FINANCIAL STATEMENTS OF SIERRA MONOLITHICS Audited Financial Statements of Sierra Monolithics

Exhibit 99.4

Sierra Monolithics, Inc.

Financial Statements as of December 31, 2008 and 2007, and for the Years Then Ended, and Independent Auditors’ Report

SIERRA MONOLITHICS, INC.

TABLE OF CONTENTS


		Page
INDEPENDENT AUDITORS’ REPORT		1

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2008 AND 2007, AND FOR THE YEARS THEN ENDED:

Balance Sheets		2–3

Statements of Operations		4

Statements of Stockholders’ Deficit		5

Statements of Cash Flows		6

Notes to Financial Statements		7–21

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of

Sierra Monolithics, Inc.

Redondo Beach, California

We have audited the accompanying balance sheets of Sierra Monolithics, Inc. (the “Company”) as of December 31, 2008 and 2007, and the related statements of operations, stockholders’ 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 of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Los Angeles, CA

April 24, 2009

SIERRA MONOLITHICS, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 2008 AND 2007


	2008		2007
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	3,941,243	$	2,940,219
Accounts receivable — net of allowance for doubtful accounts and sales return reserves of $565,377 and $814,501 in 2008 and 2007, respectively		4,057,842		6,487,577
Contract receivables		1,346,046		40,024
Inventory		6,910,819		3,292,261
Deferred income tax assets		6,079,217
Other current assets		369,037		871,149

Total current assets		22,704,204		13,631,230

PROPERTY AND EQUIPMENT — Net		3,329,852		1,448,032

DEFERRED INCOME TAX ASSETS		3,499,858

OTHER ASSETS		50,023		81,000

TOTAL	$	29,583,937	$	15,160,262

(Continued)

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SIERRA MONOLITHICS, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 2008 AND 2007


	2008			2007
LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES:
Accounts payable	$	2,095,756		$	4,023,358
Accrued expenses		3,995,703			3,112,348
Warranty obligation		5,064,660			7,987,302
Deferred revenue		16,380			769,738
Advanced payments and billings in excess of costs incurred		83,000			475,459
Current portion of credit facility		1,666,666
Current portion of obligations under capital leases		106,477			111,818
Customer advances		144,185			189,281
Income tax payable		71,336			228,559

Total current liabilities		13,244,163			16,897,863

LONG-TERM LIABILITIES:
Obligations under capital leases — excluding current portion					91,490
Long-term portion of credit facility		1,333,334

Total liabilities		14,577,497			16,989,353


COMMITMENTS AND CONTINGENCIES (Note 11)

Convertible Series A preferred stock, $0.0001 par value — authorized 10,039,783 shares; issued, and outstanding 9,838,290 and 9,684,823 shares in 2008 and 2007, respectively		22,948,579			22,948,579

Convertible Series B preferred stock, $0.0001 par value per share — authorized, issued, and outstanding 21,138,211 shares		17,733,104			17,733,104


STOCKHOLDERS’ DEFICIT:
Common stock and additional paid-in capital, $0.0001 par value per share — authorized 100,000,000 shares; issued, and outstanding 13,633,251 and 13,530,111 shares in 2008 and 2007, respectively		761,390			248,935
Accumulated deficit		(26,436,633	)		(42,759,709	)

Total stockholders’ deficit		(25,675,243	)		(42,510,774	)

TOTAL	$	29,583,937		$	15,160,262


See notes to financial statements.		(Concluded	)

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SIERRA MONOLITHICS, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007


	2008			2007
REVENUES	$	46,691,004		$	38,872,581
COSTS OF REVENUES		20,633,359			24,907,845

GROSS PROFIT		26,057,645			13,964,736
RESEARCH AND DEVELOPMENT COSTS		11,431,825			7,127,168
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES		7,584,934			5,447,700

OPERATING INCOME		7,040,886			1,389,868
INTEREST INCOME		81,848			43,032
INTEREST EXPENSE		(94,656	)		(179,017	)

INCOME BEFORE INCOME TAXES		7,028,078			1,253,883
INCOME TAX BENEFIT (EXPENSE)		9,294,998			(228,559	)

NET INCOME	$	16,323,076		$	1,025,324

See notes to financial statements.

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SIERRA MONOLITHICS, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007


	Common Stock and Additional Paid-In Capital			Accumulated Deficit			Total
	Shares	Amount		Accumulated Deficit			Total
BALANCE — January 1, 2007	12,957,083	$	—	$	(43,785,033	)	$	(43,785,033	)

Issuance of common stock upon exercise of stock options	573,028		128,677					128,677
Stock-based compensation			120,258					120,258
Net income					1,025,324			1,025,324

BALANCE — December 31, 2007	13,530,111		248,935		(42,759,709	)		(42,510,774	)

Issuance of common stock upon exercise of stock options	103,140		43,115					43,115
Stock-based compensation			469,340					469,340
Net income					16,323,076			16,323,076

BALANCE — December 31, 2008	13,633,251	$	761,390	$	(26,436,633	)	$	(25,675,243	)

See notes to financial statements.

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SIERRA MONOLITHICS, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007


	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,323,076		$	1,025,324
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,168,296			376,395
Stock-based compensation expense		469,340			120,258
(Recoveries of) provision for uncollectible accounts receivable		(85,336	)		403,414
Deferred income tax benefit		(9,579,075	)
Changes in operating assets and liabilities:
Accounts receivable		2,515,071			(4,028,196	)
Contracts receivable		(1,306,022	)		476,228
Inventory		(3,618,558	)		(1,628,690	)
Other current assets		499,712			(413,801	)
Other assets		30,977			(81,000	)
Accounts payable		(2,123,009	)		1,888,748
Accrued expenses		883,355			988,291
Warranty obligation		(2,922,642	)		5,919,065
Deferred revenue		(753,358	)		251,112
Advanced payments and billings in excess of costs incurred		(392,459	)		(693,541	)
Income tax payable		(157,223	)		228,559
Customer advances		(45,095	)		179,901

Net cash provided by operating activities		907,050			5,012,067

CASH FLOWS FROM INVESTING ACTIVITIES — Purchase of property and equipment		(2,852,310	)		(1,123,666	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility		1,000,000			4,609,205
Repayments under credit facility					(6,468,328	)
Borrowings under equipment facility		2,000,000
Repayments on obligations under capital leases		(96,831	)		(101,228	)
Proceeds from exercise of stock options		43,115			128,677

Net cash provided by (used in) financing activities		2,946,284			(1,831,675	)

NET INCREASE IN CASH		1,001,024			2,056,726

CASH — Beginning of year		2,940,219			883,493

CASH — End of year	$	3,941,243		$	2,940,219

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid during the year for:
Interest	$	84,756		$	169,897

Income taxes	$	128,000		$	118,300

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES — Property and equipment purchases in accounts payable	$	195,407		$	187,947

See notes to financial statements.

- 6 -

SIERRA MONOLITHICS, INC.

NOTES TO FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007, AND FOR THE YEARS THEN ENDED

1.	ORGANIZATION

Nature of Business — Sierra Monolithics, Inc. (the “Company”) designs and manufactures wireless chipsets and high-speed integrated circuits for optical networking applications, including 10 and 40 gigabit per second systems, focusing on physical layer and physical media dependent chipsets. The Company also provides high-performance microwave modules for wireless communication systems. The Company is headquartered in Redondo Beach, California.

The Company’s internal research and development activities to date have been funded by sales of its preferred and common stock, product sales, and from development contracts. At December 31, 2008, the Company had cash and cash equivalents of $3,941,243. Based on the Company’s projected operating cash flows for 2009, management believes that it has sufficient cash resources to fund operations and meet its obligations as they become due for the next 12 months. There can be no assurance that the Company will be able to raise additional capital, as needed, which could have a material adverse effect on the Company’s business, financial condition, or results of operations. The Company’s prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Construction-Type and Certain Production-Type Contracts. The Company recognizes revenue when it has persuasive evidence of an arrangement with a customer, which is upon entry by the Company and the customer into a legally enforceable agreement. In accounting for the contracts, the Company utilizes the cost-to-cost method of percentage-of-completion accounting in accordance with SOP No. 81-1. Revenues include amounts that can be reasonably assured and reasonably estimated. Amounts that cannot be reasonably assured and reasonably estimated are excluded from revenue until such time that a reasonable estimate can be made and the receipt of such amounts is reasonably assured. Under this method, revenues, including estimated earned fees or profits, are recorded as costs are incurred. Revenues are calculated based on the percentage of total costs incurred compared to total estimated costs at completion. Contract costs include direct materials, direct labor costs, and other direct costs related to contract performance. These costs are included in costs of revenues.

Revenue under development agreements is recognized when applicable contractual milestones have been met, including deliverables, and in any case, does not exceed the amount that would be recognized using the percentage-of-completion method in accordance with SOP No. 81-1. The cost associated with development agreements are included in cost of revenue.

Billing practices for percentage-of-completion contracts are governed by the contract terms, based upon costs incurred, achievement of milestones, or agreed-upon schedules. Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. Advanced payments and billings in excess of costs and estimated earnings are recorded as a liability in the accompanying balance sheets. When billings are less than recognized revenue, the difference is recorded as unbilled receivables. Total unbilled receivables as of December 31, 2008 and 2007, are $638,000 and $0, respectively.

The Company performs a review of uncompleted contracts. Amounts representing contract change orders or claims are included in revenues only when they meet the criteria set forth in SOP No. 81-1. Revenues include amounts that can be reasonably assured and reasonably estimated. Amounts that cannot be reasonably assured and reasonably estimated are excluded from revenue until such time that a reasonable estimate can be made and the receipt of such amounts is reasonably assured. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Changes in estimates of contract revenue, costs, and profits are recognized in the current period based on the cumulative effect of the changes on current and prior periods. Hence, the effect of the changes on future periods of contract performance is recognized as if the revised estimates had been the original estimates. A significant change in one or more projects could have a material adverse effect on the Company’s financial position or results of operations.

Cash and Cash equivalents — The Company considers short-term investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

- 8 -

Inventory — Inventory is stated at the lower of cost or market using the first-in, first-out method.

Property and Equipment — Property and equipment are stated at cost. Equipment under capital leases is stated initially at the lower of the present value of minimum lease payments at the lease inception or fair value. Depreciation of property and equipment is calculated on the straight-line method over the estimated useful lives of the assets, generally ranging from three to seven years. Leasehold improvements are amortized over the shorter of the useful life of the related asset or the lease term. Total depreciation and amortization for the years ended December 31, 2008 and 2007, was $1,168,296 and $376,395, respectively.

Software Cost — We have capitalized certain costs for the development of internal use software under the guidelines of SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. Software capitalized for internal use for the years ended December 31, 2008 and 2007, was $764,291 and $20,464, respectively. Amortization on capitalized software is calculated on the straight-line method over the estimated useful life, which has been determined to be three years.

Impairment of Long-Lived Assets — In accordance with Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment charges were recorded for long-lived assets during 2008 and 2007.

Research and Development Costs — Research and development costs related to the internal design, development, and testing of new systems, applications, and technologies are charged to expense as incurred. Total research and development costs for the years ended December 31, 2008 and 2007, were $11,146,825 and $7,127,168, respectively.

Advertising Costs — Advertising costs are expensed when incurred and are included in selling, general, and administrative expenses. Total advertising costs for the years ended December 31, 2008 and 2007, were $73,016 and $39,634, respectively.

Stock Option Plan — The Company has an employee stock option plan, which is described more fully in Note 8. Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment. FASB Statement No. 123(R) requires companies to recognize as expense the fair value of all employee equity awards, including stock option grants. Accordingly, share-based compensation is measured at the grant date, based on the fair value of the award. Prior to January 1, 2006, the Company accounted for awards granted under its stock option plan using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the

- 9 -

exercise price. The exercise price of options granted is equal to the market value of the Company’s common stock on the date of grant. Accordingly, no share-based compensation related to stock options issued was recognized in the accompanying financial statements prior to 2006.

The Company adopted FASB Statement No. 123(R) on January 1, 2006, using the prospective method, as defined under FASB Statement No. 123(R). The prospective method requires companies to record compensation cost in accordance with FASB Statement No. 123(R) only for awards issued, modified, repurchased, or canceled after the effective date and also allows companies to continue to account for previously issued awards that remain outstanding at the date of adopting FASB Statement No. 123(R) using preexisting accounting standards.

Financial Instruments and Concentration of Credit and Business Risk — Financial instruments, which potentially subject the company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company maintains cash balances with a financial institution located in California. At times, the cash balances exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk in this area.

The Company had two vendors which represented approximately 30.6% and 26.8% of inventory purchases in 2008. The Company had two vendors which represented approximately 39.0% and 18.3% of inventory purchases in 2007.

The Company had sales to three customers, which represented approximately 19.0%, 17.1%, and 13.9% of revenues, respectively, during 2008 and approximately 22.6%, 15.2%, and 8.1% of accounts receivable, respectively, as of December 31, 2008. The Company had sales to three customers, which represented approximately 27.7%, 18.4%, and 18.2% of revenues, respectively, during 2007 and approximately 16.0%, 16.8%, and 14.8% of accounts receivable, respectively, as of December 31, 2007.

Use of Estimates — The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the bad debt allowance, inventory obsolescence, stock-based compensation, and deferred income tax assets as well as estimates of revenue and expenses under long-term contracts and potential warranty claims. Actual results could differ from those estimates.

Provision for Warranties — The Company offers its customers warranties on most products sold to them. These warranties typically provide for repairs or replacement for a specified time period. Concurrent with the sale of products, a provision for estimated warranty expense is recorded with a corresponding increase in costs of revenues. This provision is adjusted periodically based on historical and anticipated experience. Actual costs of repairs under warranty, including parts and labor are charged to this provision when incurred. The Company had an accrued warranty obligation related to a specific warranty issue of $4,964,284 and $7,891,000 in 2008 and 2007, respectively. The specific warranty issue relates to a potential reliability issue with a particular product when used over an extended period of time.

- 10 -

Warranty activity for the years ended December 31, 2008 and 2007, is as follows


Balance — January 1, 2007	$	2,068,237

Additions		6,137,334
Reductions for warranty costs		(218,269	)

Balance — December 31, 2007		7,987,302

Additions		4,521
Reductions for warranty costs		(2,927,163	)

Balance — December 31, 2008	$	5,064,660

Customer Advances — In 2007, a customer paid $192,600 to the Company for the development of a specific product. The customer advance has been recognized as a $2.00 per unit credit as parts are shipped to the customer. The balance with the customer at December 31, 2008 and 2007, was $137,000 and $176,760 respectively. Certain other customers paid in advance for certain products during 2008 and 2007 and represent balances of $7,185 and $12,521 as of December 31, 2008 and 2007, respectively.

Income Taxes — The Company accounts for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes. Under FASB Statement No. 109, deferred tax assets or liabilities are computed based upon the differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rate. Deferred income tax expense or benefit are based upon the changes in the assets or liability from period to period. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

Recent Accounting Pronouncements — In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing the “more-likely-than-not” recognition threshold that a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, financial statement classification, and disclosures. FIN No. 48 was effective for fiscal years beginning after December 15, 2006. On December 30, 2008, the FASB issued FASB Staff Position (FSP) FIN No. 48-3, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises, which defers the effective date of FIN No. 48 for certain nonpublic enterprises to annual periods beginning after December 15, 2008. The Company has elected to defer the adoption of FIN No. 48 based upon the provisions of FSP FIN No. 48-3, and is currently evaluating the effect that the adoption of this interpretation will have on the Company’s financial position and results of operations.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for consistently measuring fair value in applying generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007, for financial assets and liabilities, and its provisions will be applied prospectively upon adoption. The FASB has issued FSP FAS No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which excludes FASB Statement No. 13, Accounting for Leases, as well as other accounting pronouncements that address fair value measurements on lease classification or measurement under FASB Statement No. 13. The FASB has also issued FSP FAS No. 157-2, Effective

- 11 -

Date of FASB Statement No. 157, which delays the effective date of required adoption for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company has not yet evaluated the effect that the adoption of FSP FAS No. 157-2 will have on the Company’s financial position and results of operations.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. FASB Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specific election dates. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FASB Statement No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted this standard effective January 1, 2008, and has not elected to adopt the fair value option of SFAS 159.

3.	CONTRACT RECEIVABLES

Contract receivables as of December 31, 2008 and 2007, consist of the following:


	2008		2007
Contract receivables:
Billed contract receivables	$	708,046	$	40,024
Unbilled receivables		638,000

	$	1,346,046	$	40,024

Billed contracts in process do not have retentions arising from contractual provisions. In addition, no claims are present in amounts billed as of December 31, 2008 and 2007. The Company expects all amounts billed to be collected within the next 12 months.

4.	INVENTORY

Inventory as of December 31, 2008 and 2007, consists of the following:


	2008		2007
Raw materials	$	2,797,757	$	2,187,018
Work in progress		2,345,806		430,043
Finished goods		1,767,256		675,200

	$	6,910,819	$	3,292,261

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5.	PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2008 and 2007, is summarized as follows:


	2008			2007
Office equipment	$	289,674		$	244,504
Engineering equipment		3,785,097			1,939,981
Computer equipment		1,751,841			615,325
Leasehold improvements		139,701			94,405
Leased engineering test equipment		331,046			331,046

		6,297,359			3,225,261
Less accumulated depreciation and amortization		(2,967,507	)		(1,777,229	)

	$	3,329,852		$	1,448,032

The following is an analysis of the leased property under capital leases by major classes:


	2008			2007
Engineering test equipment	$	331,046		$	331,046
Less accumulated depreciation		(248,284	)		(137,936	)

	$	82,762		$	193,110

6.	CREDIT FACILITY

In August 2005, the Company entered into a new credit agreement with a lender that allows the Company to borrow up to 80% of eligible accounts receivables, as defined in the agreement. Under the credit facility the aggregate face amount of the financed receivables outstanding at any time shall not exceed the facility amount of $6,250,000, and the bank shall have no obligation to make advances in excess of $5,000,000. The credit facility will expire on July 24, 2009. There are no financial covenants associated with the credit facility; however, there are nonfinancial covenants associated with the credit facility with which the Company is in compliance as of December 31, 2008. Advances under the credit facility bear interest at prime plus an adjustable margin (3.25% at December 31, 2008) in addition to a 0.25% administrative fee. Advances due under the credit facility as of December 31, 2008 and 2007, were $1,000,000 and $0, respectively. Available borrowings under the credit facility as of December 31, 2008 and 2007, were $4,275,148 and $4,162,967, respectively.

On February 4, 2009, the Company amended the terms of this credit agreement with the lender. The maximum aggregate face amount was reduced from $6,250,000 to $5,312,500, and the maximum advance was reduced from $5,000,000 to $4,250,000. The line was extended from July 24, 2009 to July 24, 2010.

- 13 -

On February 4, 2009, the Company entered into an additional, $1,500,000 equipment facility with the same lender. The interest rate is prime, plus 2%. Repayment is based on 36 consecutive equal monthly installments commencing with the first day of the month following the advance. As of March 13, 2009, the Company had borrowed $862,400 against this facility.

7.	INCOME TAXES

The provision for income tax for the years ended December 31, 2008, and 2007, consisted of the following:


	2008			2007
Current:
Federal	$	78,963		$	171,172
State		205,114			57,387

		284,077			228,559

Deferred:
Federal		1,877,786			561,848
State		(514,106	)		69,276

		1,363,680			631,124

Valuation allowance		(10,942,755	)		(631,124	)

Total income tax (benefit) provision	$	(9,294,998	)	$	228,559

Income tax expense for years ended December 31, 2008 and 2007, differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income (loss) as a result of the following:


	2008			2007
Computed “expected” tax expense	$	2,389,548		$	426,319
Reduction in income taxes resulting from change in the valuation allowance for deferred tax assets		(10,942,755	)		(357,070	)
State income tax benefit — net of federal income taxes		(203,935	)		85,643
Research and development credits		(774,827	)
Other		236,971			73,667

	$	(9,294,998	)	$	228,559

- 14 -

The tax effects of temporary difference that give rise to significant portions of deferred tax assets as of December 31, 2008 and 2007, are as follows:


	2008			2007
Deferred tax assets:
Net operating loss carryforwards	$	5,532,363		$	5,925,296
Accrued expenses		208,928			954,401
Allowance and reserves		2,587,031			3,643,701
Tax credits carryforwards		1,847,461			227,759
State taxes		69,739
Other		379,429			191,598

		10,624,951			10,942,755

Deferred tax liabilities:
Deferred revenue		(46,487	)
Other		(189,773	)
State Taxes		(809,616	)

		(1,045,876	)		—
Less valuation allowance					(10,942,755	)

Net deferred taxes	$	9,579,075		$	—

SFAS No. 109, Accounting for Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2008, the Company evaluated the positive and negative evidence regarding the future realization of the deferred tax assets. Pursuant to this evaluation, the Company concluded that the available objective positive evidence regarding its ability to generate future federal taxable income substantially outweighed the available objective negative evidence regarding future federal taxable income. As a result, the Company believes it is more likely than not that its deferred tax assets will be realized in future years. Accordingly, as of December 31, 2008, the Company has not recorded any valuation allowance against deferred tax assets.

As of December 31, 2008, the Company has net operating loss carryforwards for federal and state income tax purposes of $13,717,807 and $9,822,497 which are available to offset future taxable income, if any, through 2027 and 2018, respectively. The Company experienced a change in ownership in fiscal year 2002, accordingly, in accordance with Internal Revenue Code Section 382, the annual utilization of net operating loss carryforwards existing prior to a change in control of the Company are limited. The federal net operating loss carryforwards includes $4,425,143 which are subject to certain annual limitations of $1,353,633 under the Internal Revenue Code Section 382. Additionally, as a result of the adoption of FASB Statement No. 123(R), the Company recognizes tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards relating to stock option deductions occurring from January 1, 2006, onward. A tax benefit occurs when the actual tax benefit realized upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award.

- 15 -

8.	STOCK-BASED COMPENSATION

During 2000, the Company’s board of directors approved the 2000 Stock Incentive Plan, which provides for grants of incentive stock options and nonqualified stock options. Under the 2000 Plan, options may be granted from time to time for an aggregate of no more than 11,474,631 shares of common stock as determined by the board of directors. During 2007, the Company’s board of directors approved the 2007 Stock Incentive Plan which provides for grants of incentive stock options and unqualified stock options. Under the 2007 Plan (the “Plan”), options may be granted from time to time for an aggregate of no more than 3,000,000 shares of common stock as determined by the board of directors.

Stock-based compensation has been recorded in the statement of operations for the years ended December 31, 2008 and 2007, as follows:


	2008		2007
Cost of revenues	$	37,378	$	4,840
Research and development costs		160,109		41,280
Selling, general, and administrative		271,853		74,138

Stock based compensation before taxes		469,340		120,258

Related income tax benefit		—		—

Stock based compensation — net of estimated taxes	$	469,340	$	120,258

At December 31, 2008, there were 287,512 additional shares available for grant under the Plan.

Under the provisions of FASB Statement No. 123(R), as adopted by the Company on January 1, 2006, the weighted-average fair value of each option grant for the years ended December 31, 2008 and 2007, has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	2008		2007
Interest rate (risk free)	1.05	%	3.51	%
Volatility	50.0		50.0
Expected dividends	0.0		0.0
Expected life of option	6.2 years		6.2 years

Using these assumptions, the weighted-average fair value of each stock option granted was $0.51 and $0.41 per share for the years ended December 31, 2008 and 2007, respectively. Expected volatilities were based on a volatility factor computed based upon an external peer group analysis of publicly traded companies based in the United States within a predetermined market capitalization range (“public comparables”). The analysis provided historical and implied volatilities of the public comparables and developed an estimate of expected volatility for the Company. The risk-free interest rate is based on U.S.

- 16 -

Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company has not historically paid dividends, thus no dividends are expected. The Company determined the 2008 and 2007 expected term assumptions under the “Simplified Method” as defined in Staff Accounting Bulletins Nos. 107, Share-Based Payment, and 110, Share-Based Payment, as it lacks historical data and is unable to make reasonable expectations regarding future exercise patterns.

The total intrinsic value of the options exercised and the total calculated value of the options vested for the years ended December 31, 2008 and 2007, are as follows:

Options outstanding that were issued after January 1, 2006, that are expected to vest are net of estimated future option forfeitures in accordance with the provisions of FASB Statement No. 123(R). As of December 31, 2008, there was $2,134,406 of unrecognized compensation cost related to stock options granted after January 1, 2006. The unrecognized compensation cost is expected to be recognized over the relevant vesting period.

Summary stock option activity during the periods indicated is as follows:


	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (In Years)
Outstanding — January 1, 2007	9,533,886		$	0.28

Granted	2,233,155			0.73
Exercised	(573,028	)		0.22
Canceled	(1,017,905	)		0.37

Outstanding — December 31, 2007	10,176,108			0.37

Granted	2,860,500			1.34
Exercised	(103,140	)		0.42
Canceled	(425,041	)		0.84

Outstanding — December 31, 2008	12,508,427		$	0.58	6.82

Vested and expected to vest — December 31, 2008	9,468,592		$	0.56	6.60

Exercisable — December 31, 2008	7,077,085		$	0.33	5.26

- 17 -

A summary of stock option information as of December 31, 2008, is as follows:


	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number of Options	Weighted- Average Exercise Price		Number of Options	Weighted- Average Exercise Price
$ 0.00 – 0.50	7,207,877	$	0.19	5,136,701	$	0.17
0.51 – 1.00	1,800,050		0.69	1,704,217		0.60
1.01 – 3.00	3,500,500		1.32	236,167		1.27

	12,508,427			7,077,085

9.	STOCKHOLDERS’ EQUITY

Authorized Shares — As of December 31, 2008, the Company’s Amended and Restated Articles of Incorporation (“Articles”) authorize the issuance of shares designated as common stock and preferred stock, each having a par value of $0.0001 per share. As of December 31, 2008, the shares of common stock and preferred stock authorized were 100,000,000 and 31,177,994, respectively.

Significant rights, preferences, and privileges of the Series A and Series B preferred stock as of December 31, 2008 and 2007, are listed below.

Conversion Rights — Each share of the preferred stock outstanding is convertible, at the option of the holder, into common stock at a conversion rate determined by dividing (i) $1.5213 in the case of Series A preferred stock, and (ii) $0.615 in the case of Series B preferred stock by the conversion price (as defined in the Company’s Articles) applicable to such share in effect on the date that the certificate is surrendered for conversion. The initial conversion price for the Series A preferred stock is $1.189 and $0.615 for the Series B preferred stock. Such initial conversion price is subject to adjustment for certain dilutive issuances, splits, and combinations (as defined in the Company’s Articles).

- 18 -

Liquidation Preference — (1) In the event of a liquidation, dissolution, or winding-up of the Company, the holders of Series A and Series B preferred stock are entitled to receive proportionally a liquidation preference of up to (A) $1.5213 per share for each share of Series A preferred stock then held by them and (B) $0.615 per share for each of Series B preferred stock then held by them, plus declared but unpaid dividends based on the amount of the available assets. Any remaining assets are to be distributed (i) first, among the holders of the Series A and Series B preferred stock and the common stock pro rata based on the number of shares of common stock held by each (assuming conversion) until the holders of (a) the Series B preferred stock receive up to an aggregate of $1.845 per share of Series B preferred stock (including amounts paid under (1)); (b) next, if assets remain in the Company, the holders of Series A preferred stock receive up to an aggregate of $4.5639 per share of Series A preferred stock (including amounts paid under (1)); (ii) next, if assets remain in the Company, the holders of the common stock will receive up to an aggregate of $4.5639 per share (including amounts paid under (a) and (b)); and (iii) thereafter, any remaining assets are to be distributed among the holders of the Series A and Series B preferred stock and the common stock pro rata on an as if converted basis.

Deemed Liquidation — A liquidation, dissolution, or winding-up of the Company shall be deemed to occur if the Company shall sell, convey, or otherwise dispose of all or substantially all of its property or business or merge with or into or consolidate with any other corporation (other than a wholly owned subsidiary corporation) in which the shareholders of the Company own less than 50% of the voting power of the surviving corporation following the transaction. As a result, the Company does not control whether the redeemable convertible preferred stock may be redeemed in connection with such deemed liquidation and has, therefore, classified such preferred stock outside of permanent equity on the accompanying balance sheets.

Redemption Rights — During the one-year period beginning on May 20, 2005, had the Company received a written request from the holders owning at least a majority of the then outstanding shares of Series A and Series B preferred stock that at least a majority of the outstanding shares of such series held by them be redeemed, then the Company would have been requested to redeem the number of shares specified in the redemption election. The redemption price would have been the greater of the then fair market value of common stock as if converted or (i) $1.5213 per share of Series A preferred stock and (ii) $0.615 per share of Series B preferred stock (as adjusted for any stock dividends, combinations, or splits), plus interest at a rate of 8.0% per year, compounded semiannually. The Company accreted interest on the preferred stock over the period that began on the issuance date and ended on May 19, 2006, the expiration of the redemption option. The one-year period ending May 19, 2006, expired without the shareholders making the election to redeem their shares of preferred stock. Thus, the Series A and Series B preferred stock is no longer redeemable at the stockholder’s request.

- 19 -

10.

RETIREMENT BENEFIT PLAN

Under the Company’s 401(k) profit-sharing plan, employees may elect to have a portion of their compensation deferred and contributed to their 401(k) accounts. Employee contributions vest immediately. The Company may make discretionary matching contributions to the Plan that are allocated to the plan participants based on each participant’s proportional deferral of the total employee deferrals in a plan year. An additional annual contribution may be made at the discretion of the Company’s board of directors. No employer contributions were made to the plan during fiscal years 2008 or 2007.

11.

COMMITMENTS AND CONTINGENCIES

Warranty Obligation — The Company recorded a warranty obligation related to defects discovered within the 40 gigabit per second serializer and deserializer devices used for optical communication applications as a result of an issue within the manufacturing process. This defect is evident when the devices were used over an extended period of time. The Company has changed the manufacturing process associated with this integrated circuit and performed testing which indicated no further defect. Management determined that it is both probable that a loss exists and that the amount of loss can be reasonably estimated. Management estimates that the exposure related to the replacement and potential settlement with certain customers is $4,964,284 as of December 31, 2008. Management expects settlement to be in the form of replacement product as well as compensation for damages paid in cash, and reductions of previously negotiated prices. Based on the current status of the Company’s settlement negotiations with its impacted customers, management believes that a material loss in excess of amounts provided is not reasonably possible.

Capital Leases — During fiscal year 2006, the Company leased equipment under various capital lease obligations which expire in 2009.

Future minimum payments as of December 31, 2008, under the aforementioned capital lease obligations are as follows:


2009	$	111,893

Total minimum lease payments		111,893
Less amount representing interest		(5,416	)

Present value of minimum lease payment		106,477
Less current portion		(106,477	)

Long-term portion	$	—

Operating Leases — The Company leases certain equipment and office facilities under operating leases. Total rent expense was approximately $1,554,615 and $1,366,264 for the years ended December 31, 2008, and 2007, respectively.

- 20 -

Future noncancelable minimum commitments under operating leases as of December 31, 2008, are as follows:


Year Ending December 31
2009	$	488,328
2010		371,048
2011		389,298
2012		407,550
2013		425,792
Thereafter		71,472

	$	2,153,488

In March 2009, the Company signed a 5 year lease for a 15,207 square feet building for additional manufacturing, development and administration facilities. The total lease payments over 5 years will be $1,902,396.

Governmental Services — As the Company provides services to various government agencies, it is subject to retrospective audits, which may result in adjustments to previously recorded revenues, and the Company may be subject to investigation by governmental entities. Failure to comply with the terms of any governmental contract could result in civil and criminal fines and penalties, as well as suspension from future government contracts. The Company is not aware of any adjustments, fines, or penalties that could have a material adverse effect on its financial position, results of operations, or liquidity.

Software License — During 2008, the Company entered into a $1,600,000 licensing contract with a software vendor for the use of software. The contract requires 8 installments beginning April 2008 through January 2010. $600,000 was paid in 2008. Future payments under this contract are $800,000 in 2009 and $200,000 in 2010. In 2008, the Company entered into another $200,000 licensing contract with this software vendor. The contract requires 8 installments beginning October 2008 through July 2010. $25,000 was paid in 2008. Future payments under this contract are $100,000 in 2009 and $75,000 in 2010.

* * * * * *

- 21 -

EX-99.5 5 dex995.htm UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS Unaudited Pro Forma Combined Condensed Financial Statements

Exhibit 99.5

SEMTECH CORPORATION

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

On December 9, 2009, Semtech Corporation (“Semtech”) completed the acquisition of all outstanding equity interests of Sierra Monolithics, Inc. (“Sierra Monolithics”) pursuant to an agreement and plan of merger, dated as of November 18, 2009 and subsequently amended as of December 9, 2009, by and among Semtech, Sierra Monolithics, SMI Merger Corp., a newly formed wholly-owned subsidiary of Semtech (“Merger Sub”), and Shareholder Representative Services, LLC (the “Merger Agreement”). Pursuant to the Merger Agreement, Semtech agreed to the merger of Merger Sub with and into Sierra Monolithics, with Sierra Monolithics surviving the merger and becoming a wholly owned subsidiary of Semtech.

The acquisition consideration consisted of a payment of $180.0 million in cash in exchange for all the outstanding shares of Sierra Monolithics common stock and preferred stock, as well as all vested stock options. In order to satisfy any indemnifiable claims that may arise as a result of, among other things, inaccuracies in or breaches of representations, warranties and covenants pursuant to the terms of the Merger Agreement, approximately $18.0 million of the acquisition consideration has been placed into an escrow fund for twelve months and will be released, subject to pending or unresolved indemnification claims, on the first anniversary of the acquisition.

In addition to the cash consideration, Semtech also assumed the existing unvested stock options of Sierra Monolithics with an estimated fair value of approximately $8.0 million, of which approximately $458,000 was attributed to services performed prior to the acquisition and has been included in the consideration transferred. In connection with the acquisition, Semtech has granted restricted stock units to Sierra Monolithics employees valued at approximately $11.5 million which either vest over a four year period starting on the acquisition date or approximately two years for any performance based restricted stock units.

The acquisition is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations. As such, the Sierra Monolithics’ assets acquired and liabilities assumed are recorded at their acquisition-date fair values. Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The Company expects that all such goodwill will not be deductible for tax purposes. The acquired in-process research and development is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts.

The allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, based on their respective fair values, requires extensive use of accounting estimates and judgments. The Company has engaged an independent-third-party valuation firm to assist in determining the fair values of certain identifiable intangible assets (including in-process acquired research and development), and certain tangible assets. The more significant assumptions included determining the timing and costs required to complete the in-process projects, estimating future cash flows, and developing appropriate discount rates. To the extent that preliminary estimates have been used, such estimates are subject to change during the allocation period as such estimates, analysis and valuations are finalized.

The following unaudited pro forma combined condensed financial statements are based on the separate historical financial statements of Semtech and Sierra Monolithics after giving effect to the acquisition and the assumptions and preliminary pro forma adjustments described in the accompanying notes to the unaudited combined condensed financial statements. As Semtech and Sierra Monolithic have different fiscal year ends, the unaudited pro forma combined condensed balance sheet as of October 25, 2009 combines Semtech’s historical unaudited balance sheet as of October 25, 2009 with Sierra Monolithics’ historical unaudited balance sheet as of September 30, 2009 as if the acquisition had occurred as of October 25, 2009. The unaudited pro forma combined condensed statement of operations for the nine months ended October 25, 2009 and the year ended January 25, 2009 are presented as if the acquisition had occurred on January 28, 2008 and have been adjusted to give effect to pro forma events that are i) directly attributable to the acquisition, ii) factually supportable, and iii) expected to have a continuing impact on the combined results of the companies. The unaudited pro forma combined condensed statement of operations for the nine months ended October 25, 2009 combines the unaudited historical results of Semtech for the nine months ended October 25, 2009 and the unaudited historical results of Sierra Monolithics for the nine months ended September 30, 2009. The unaudited pro forma combined condensed statement of operations for the year ended January 25, 2009 combines the historical results of Semtech for year ended January 25, 2009 and the historical results of Sierra Monolithics for the year ended December 31, 2008.

The unaudited pro forma combined condensed financial statements are provided for informational purposes only. The unaudited pro forma combined condensed financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition been completed as of the dates indicated or that may be achieved in the future and should not be taken as representative of future consolidated results of operations or financial condition of Semtech. Furthermore, no effect has been given in the unaudited pro forma combined condensed statements of operations for synergistic benefits and potential cost savings, if any, that may be realized through the combination of the two companies or the costs that may be incurred in integrating their operations.

The unaudited pro forma combined condensed financial statements should be read together with the accompanying notes to the unaudited pro forma combined condensed financial statements, the historical consolidated financial statements of Semtech and accompanying notes included in the Semtech Annual Report on Form 10-K for the year ended January 25, 2009 and its Quarterly Report on Form 10-Q for the quarter ended October 25, 2009, and the historical financial statements of Sierra Monolithics and the accompanying notes for the year ended December 31, 2008 and the unaudited condensed financial statements for the nine months ended September 30, 2009, included in Exhibits 99.3 and 99.4 to this Current Report on Form 8-K/A.

Semtech Corporation

Unaudited Pro Forma Combined Condensed Statement of Operations

Year Ended January 25, 2009

(In thousands, except per share amounts)


	Historical year ended
	January 25, 2009 Semtech		December 31, 2008 Sierra Monolithics			Pro Forma Adjustments			Notes		Pro Forma Combined
Net sales	$	294,820	$	46,691		$	—				$	341,511
Cost of sales		135,233		20,633			335		(a	)		156,241
							40		(b	)

Gross profit		159,587		26,058			(375	)				185,270

Operating costs and expenses:
Selling, general and administrative		76,291		7,585			2,395		(a	)		87,614
							1,343		(b	)
Product development & engineering		41,405		11,432			1,288		(a	)		56,194
							2,069		(b	)
Amortization of acquired intangible assets		—		—			8,410		(d	)		8,410

Total operating costs and expenses		117,696		19,017			15,505					152,218


Operating income		41,891		7,041			(15,880	)				33,052
Interests and other income (expense), net		4,287		(13	)		(4,320	)	(e	)		(46	)

Income before taxes		46,178		7,028			(20,200	)				33,006
Provision (benefit) for taxes		8,657		(9,295	)		5,725		(f	)		5,087

NET INCOME	$	37,521	$	16,323		$	(25,925	)			$	27,919


Earnings per share:
Basic	$	0.61							(h	)	$	0.46
Diluted	$	0.61							(h	)	$	0.45

Weighted average number of shares used in computing earnings per share
Basic		61,249							(h	)		61,249
Diluted		61,999							(h	)		62,125

See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements.

Semtech Corporation

Unaudited Pro Forma Combined Condensed Statement of Operations

Nine Months Ended October 25, 2009

(In thousands, except per share amounts)


	Historical nine months ended
	October 25, 2009 Semtech			September 30, 2009 Sierra Monolithics			Pro Forma Adjustments			Notes	Pro Forma Combined
Net sales	$	201,541		$	37,086		$	—			$	238,627
Cost of sales		91,286			16,124			93		(a)		107,533
								30		(b)

Gross profit		110,255			20,962			(123	)			131,094

Operating costs and expenses:
Selling, general and administrative		53,625			6,033			667		(a)		60,732
								1,007		(b)
								(600	)	(c)
Product development & engineering		31,142			10,334			359		(a)		43,387
								1,552		(b)
Amortization of acquired intangible assets		—			—			6,308		(d)		6,308

Total operating costs and expenses		84,767			16,367			9,293				110,427

Operating income		25,488			4,595			(9,416	)			20,667
Interests and other income (expense), net		2,708			(123	)		(1,137	)	(e)		1,448

Income before taxes		28,196			4,472			(10,553	)			22,115
Provision (benefit) for taxes		36,719			1,938			(4,107	)	(f)		1,750
								(32,800	)	(g)

NET (LOSS) INCOME	$	(8,523	)	$	2,534		$	26,354			$	20,365


(Loss)Earnings per share:
Basic	$	(0.14	)							(h)	$	0.34
Diluted	$	(0.14	)							(h)	$	0.33

Weighted average number of shares used in computing (loss) earnings per share
Basic		60,622								(h)		60,760
Diluted		60,622								(h)		61,491

See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements.

Semtech Corporation

Unaudited Pro Forma Combined Condensed Balance Sheet

As of October 25, 2009

(In thousands)


	As of October 25, 2009 Semtech Historical			As of September 30, 2009 Sierra Monolithics Historical			Pro Forma Adjustments			Notes	Pro Forma Combined
Assets
Cash and cash equivalents	$	103,053		$	5,325		$	(103,053	)	(i)	$	5,325
Temporary investments		167,540			—			(76,947	)	(i)		90,593
Receivables, net		25,501			7,836			—				33,337
Inventories		25,428			4,589			3,600		(j)		33,617
Deferred income taxes		—			2,853			8,381		(k)		11,234
Other current assets		8,101			595			—				8,696

Total current assets		329,623			21,198			(168,019	)			182,802
Property, plant and equipment, net		34,472			3,982			—				38,454
Investments, maturities in excess of 1 year		45,727			—			—				45,727
Deferred income taxes		9,894			4,997			(14,891	)	(q)		—
Goodwill		25,540			—			103,280		(l)		128,820
Acquired intangible assets		—			—			82,300		(m)		82,300
Other intangibles, net		3,483			—			—				3,483
Other assets		9,771			50			—				9,821

TOTAL ASSETS	$	458,510		$	30,227		$	2,670			$	491,407

Liabilities and stockholders’ equity
Accounts payable	$	19,390		$	2,314		$	—			$	21,704
Accrued liabilities		16,971			3,317			2,500		(n)		26,188
								3,400		(o)
Income taxes payable		2,595			—			—				2,595
Deferred revenue		2,368			28			(28	)	(p)		2,368
Accrued taxes		3,247			—			—				3,247
Deferred income taxes		15,778			—			—				15,778
Current portion of credit facility		—			1,167			—				1,167
Other current liabilities		—			3,699			(525	)	(p)		3,174

Total current liabilities		60,349			10,525			5,347				76,221
Deferred income taxes		101			—			33,285		(q)		18,495
								(14,891	)	(q)
Accrued taxes		1,329			—			—				1,329
Long-term portion of credit facility		—			1,573			—				1,573
Other long-term liabilities		7,428			—			—				7,428
Commitments and contingencies		—			—			—				—
Convertible series A preferred stock		—			22,949			(22,949	)	(r)		—
Convertible series B preferred stock		—			17,733			(17,733	)	(r)		—
Stockholders’ equity (deficit):
Common Stock		784			1			(1	)	(r)		784
Treasury stock, at cost		(280,202	)		—			—				(280,202	)
Additional paid-in capital		342,682			1,348			(1,348	)	(r)		343,140
								458		(s)
Retained earnings (accumulated deficit)		325,223			(23,902	)		23,902		(r)		321,823
								(3,400	)	(o)
Accumulated other comprehensive income		816			—			—				816

Total stockholders’ equity (deficit)		389,303			(22,553	)		19,611				386,361

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	458,510		$	30,227		$	2,670			$	491,407

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED

FINANCIAL STATEMENTS

Note 1- Basis of Pro Forma Presentation

On December 9, 2009, Semtech acquired all outstanding equity interests of Sierra Monolithics, a supplier of analog and mixed-signal IC solutions for optical communications, wireless and microwave/millimeter wave applications. Under the terms of the acquisition, the Company paid an aggregate of $180.0 million in cash in exchange for all the outstanding shares of Sierra Monolithics common stock and preferred stock, as well as all vested stock options, of which $18.0 million was placed in escrow for twelve months in order to satisfy any indemnifiable claims that may arise as a result of, among other things, inaccuracies in or breaches of representations, warranties and covenants pursuant to the terms of the Merger Agreement. The Company also assumed the existing unvested stock options of Sierra Monolithics in exchange for options to purchase approximately 670,000 shares of the Company’s common stock with an approximate estimated fair value of $8.0 million, of which approximately $458,000 was attributed to services performed prior to the acquisition and has been included in the consideration transferred and the remaining amounts will result in compensation expense of approximately $7.5 million, which will be recognized over the remaining vesting period of these equity awards, which ranges from one month to four years, subject to adjustment based on estimated forfeitures.

The total estimated acquisition consideration used in preparing the unaudited pro forma condensed combined financial statements is as follows (in thousands):


Acquisition Consideration:
Cash	$	180,000
Sierra Monolithics unvested stock options exchanged for 670,000 Semtech stock options		458

Total estimated acquisition consideration	$	180,458

In connection with the acquisition, Semtech has granted 551,000 restricted stock unit awards to Sierra Monolithic employees which will vest over a four year period and performance units awards for a maximum number of 135,500 shares of Semtech’s common stock to be earned based upon meeting certain performance conditions over a two year period. The total value of such awards is approximately $11.5 million as of the acquisition date and will be recognized as compensation expense in future periods based on the number of shares that are expected to vest (subject to adjustment based on estimated forfeitures and the likelihood of meeting performance criteria for awards that are subject to such conditions).

Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Sierra Monolithics based on their estimated fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. For the purposes of the unaudited pro forma combined condensed financial statements, Semtech has made a preliminary allocation of the acquisition consideration as of October 25, 2009 as follows (in thousands):


Net tangible assets acquired	$	11,932
Deferred tax assets		16,231
Deferred tax liabilities		(33,285	)
Amortizable intangible assets:
Current technology		59,900
Customer relationships		12,100
In-process research and development		10,300
Goodwill		103,280

Total preliminary acquisition consideration allocation	$	180,458

Approximately $72.0 million has been preliminarily allocated to amortizable intangible assets acquired. The amortization related to the preliminary fair value of amortizable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma combined condensed statements of operations. Semtech expects to amortize these intangible assets on a straight-line basis ranging from two to ten years for current technology and eight to ten years for customer relationships. In-process research and development, with an approximate value of $10.3 million, is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts. Upon completion of development, acquired in-process research and development assets are generally considered amortizable, finite-lived assets.

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill amounts are not amortized, but rather are tested for impairment at least annually. In the event that Semtech determines that the value of goodwill has become impaired, Semtech will incur an accounting charge for the amount of impairment during the fiscal quarter in which such determination is made.

The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma condensed combined financial statements.

Note 2 - Preliminary Pro Forma and Acquisition Accounting Adjustments

Unaudited Pro Forma Combined Condensed Statements of Operations

To reflect additional compensation expense associated with fair valuing the unvested Sierra Monolithics stock options that were assumed at the time of the acquisition.

To reflect the estimated compensation expense associated with the issuance of the restricted stock units granted to Sierra Monolithics employees in connection with the acquisition.

To eliminate non-recurring acquisition-related costs that have been recorded in Semtech’s historical results through October 25, 2009.

To reflect the amortization of the preliminary fair values of the acquired intangible assets as follows (in thousands):


	Intangible Assets		Estimated Useful Lives (yrs)	Pro Forma amortization for year ended January 25, 2009		Pro Forma amortization for nine months ended October 25, 2009
Current Technology	$	59,900	2-10	$	7,053	$	5,290
Customer Relationships		12,100	8-10		1,357		1,018

	$	72,000		$	8,410	$	6,308

To reflect the estimated decrease in interest income due to the use of Semtech’s cash and cash equivalents and temporary investments to pay the cash consideration based on Semtech’s historical average investment yields of approximately 2.4% for the year ended January 25, 2009 and 0.8% for the nine months ended October 25, 2009.

To reflect the tax effects of the pro forma adjustments b), d), and e) and the historical pre-tax income of Sierra Monolithics at an estimated combined United States federal and state statutory tax rate of 39.0%.

To eliminate the effect of the tax provision that was recorded in Semtech’s historical results through October 25, 2009 associated with its intended repatriation of foreign earnings to partially fund the acquisition. In connection with its pending acquisition of Sierra Monolithics, the Company reviewed its prior assertions regarding the amount of foreign subsidiary earnings that were considered to be permanently reinvested offshore and concluded that $120 million of foreign earnings may no longer be permanently reinvested offshore, as it intends to repatriate foreign earnings to partially fund the acquisition. This change in assertion resulted in a $39.2 million increase in Semtech’s tax provision for the period ended October 25, 2009. The impact of this change in assertion was partially offset by the release of $6.4 million of valuation allowances.

Pro forma basic earnings per share is calculated by dividing the pro forma combined net income by the pro forma weighted average basic shares used in computing net earnings per share. Pro forma diluted earnings per share is calculated by dividing the pro forma combined net income by the pro forma weighted average diluted shares used in computing net earnings per share. A reconciliation of the shares used to calculate Semtech’s historical basic and diluted earnings (loss) per share to shares used to calculate the pro forma basic and diluted earnings per share follows (in thousands):

Year ended January 25, 2009


	Basic	Diluted
Shares used to compute Semtech’s historical earnings per share	61,249	61,999
Dilutive effect of assumed stock options	—	126

Shares used to compute pro forma earnings per share	61,249	62,125


Nine months ended October 25, 2009

	Basic	Diluted
Shares used to compute Semtech’s historical loss per share	60,622	60,622
Vesting of restricted stock units issued to Sierra Monolithics employees	138	138
Dilutive effect of Semtech’s equity incentive plans due to pro forma net income	—	414
Dilutive effect of assumed stock options	—	317

Shares used to compute pro forma earnings per share	60,760	61,491

Unaudited Pro Forma Combined Condensed Balance Sheet

To reflect the use of Semtech’s cash and cash equivalents and temporary investments to fund the cash portion of the acquisition consideration.

To reflect an adjustment of the historical Sierra Monolithics inventories to estimated fair value. Because this adjustment is directly attributed to the transaction and will not have an ongoing impact, it is not reflected in the unaudited pro forma combined condensed statement of operations. However, this inventory adjustment will impact Cost of Sales subsequent to the consummation of the transaction.

To reflect the value of Sierra Monolithics’ net operating losses related to equity compensation deductions that were not previously recognized by Sierra Monolithics and to reflect the tax-deductible portion of transaction costs incurred by Sierra Monolithics.

To reflect the preliminary goodwill resulting from the acquisition. See also Note 1 for a more detailed discussion.

To reflect the preliminary estimated identifiable intangible assets, which include current technology, customer relationships, and in-process research and development. See also Note 1 for a more detailed discussion.

To reflect the estimated transaction costs incurred by Sierra Monolithics in connection with the acquisition.

To reflect the estimated transaction costs incurred by Semtech subsequent to October 25, 2009 that will be recognized in Semtech’s financial statements post-acquisition in the period they are incurred.

To adjust certain liability balances of Sierra Monolithics, including certain advance receipts for research and development services and deferred revenue, to preliminary estimated fair values.

To reflect a $33.3 million deferred tax liability related to the purchase price basis adjustments including intangible assets, inventory and certain liability balances at an estimated statutory tax rate of 39%, and a related reclassification of $14.9 million of Semtech and Sierra Monolithics historical long-term deferred tax assets against this amount.

To reflect the elimination of the historical convertible preferred stock and equity balances of Sierra Monolithics.

To reflect the fair value of a portion of the assumed Sierra Monolithics’ stock options that were included as part of the consideration transferred. See also Note 1 for a more detailed discussion.

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