ACQUISITION OF NET

9 Months Ended

Sep. 28, 2012

ACQUISITION OF NET

ACQUISITION OF NET

(2) ACQUISITION OF NET

        On August 24, 2012 (the "NET Acquisition Date"), the Company acquired all of the outstanding common stock of NET for cash consideration of $41.5 million, or $1.35 per share of NET common stock. The acquisition was effected through a merger of a wholly-owned subsidiary of the Company into NET with NET surviving the merger as a wholly-owned subsidiary of the Company. NET is a provider of networking equipment focused on secure real-time communications for UC, SIP trunking, enterprise mobility and IP-based multi-service networking. The Company acquired NET to enhance its position as an enabler of cloud-based UC. The acquisition of NET expands the Company's portfolio of Session Border Controller ("SBC") solutions for enterprise customers and is expected to bring engineering resources, broader channel capability and a broad U.S. federal government installed base to leverage into SIP-enabled platforms.

        The transaction has been accounted for as a business combination and the financial results of NET have been included in the Company's condensed consolidated financial statements for the period subsequent to its acquisition. The Company's financial results for both the three and nine months ended September 28, 2012 include $7.2 million of revenue and $2.0 million of net loss attributable to NET for the period subsequent to its acquisition.

        As of September 28, 2012, the valuation of acquired assets, identifiable intangible assets, uncertain tax liabilities and certain accrued liabilities is preliminary. The Company is in the process of investigating the facts and circumstances existing as of the NET Acquisition Date in order to finalize its valuation. Based on the preliminary purchase price allocation, the Company recorded $29.5 million of goodwill, which is primarily due to expected synergies between the combined companies and expanded market opportunities with broader SBC product solution offerings.

        The acquisition was accounted for as a nontaxable business combination and the Company carried over the existing tax basis of the acquired assets and assumed liabilities. The Company concluded that there was insufficient positive evidence to overcome the more objective evidence of cumulative losses and accordingly, a valuation allowance against these assets has been recorded in purchase accounting. As further described in Note 14, following the acquisition, the Company intends to elect under Section 338(g) of the Internal Revenue Code to have the transaction treated as an asset acquisition (i.e., a taxable transaction) and therefore the goodwill will be deductible for tax purposes over 15 years.

        A summary of the preliminary allocation of the purchase consideration for NET is as follows (in thousands):

Fair value of consideration transferred:
Cash, net of cash acquired	$	35,508
Fair value of equity awards assumed (see Note 11)		892
Fair value of total consideration	$	36,400
Fair value of assets acquired and liabilities assumed:
Marketable securities	$	5,359
Deferred income taxes		804
Other current assets		12,095
Property and equipment		4,694
Noncurrent investments		10,167
Intangible assets		16,810
Goodwill		29,501
Other noncurrent assets		1,843
Current liabilities		(9,993	)
Debt		(34,208	)
Other long-term liabilities		(672	)
	$	36,400

        The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired customer relationships and developed technology intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of contract renewal, technology attrition and revenue growth projections. The Company is amortizing the identifiable intangible assets either on a straight line basis or in relation to the expected cash flows from the individual intangible assets over their respective useful lives (see Note 7).

        The identifiable intangible assets as of the NET Acquisition Date are as follows (in thousands):

Developed technology	$	9,080
Customer relationships	$	6,140
Order backlog	$	860
Internal use software	$	730

Pro Forma Results

        The following unaudited pro forma information presents the condensed combined results of operations of the Company and NET for the three and nine months ended September 28, 2012 and September 30, 2011 as if the acquisition of NET had been completed on January 1, 2011 with adjustments to give effect to pro forma events that are directly attributable to the acquisition. These pro forma adjustments include a reduction of historical NET revenue for the fair value adjustment related to acquired deferred revenue, an increase in amortization expense for the acquired identifiable intangible assets, a decrease in historical NET interest expense reflecting the extinguishment of NET's debt as a result of the acquisition, and the elimination of transaction costs included in the Company's and NET's historical results, directly attributable to the acquisition from the three and nine months ended September 28, 2012 and inclusion of such costs in the nine months ended September 30, 2011.

        The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and NET. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts):

	Three months ended						Nine months ended
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
Revenue	$	63,358		$	82,484		$	207,847		$	224,789
Net loss	$	(15,263	)	$	(6,777	)	$	(48,861	)	$	(51,919	)
Loss per share	$	(0.05	)	$	(0.02	)	$	(0.17	)	$	(0.19	)

Acquisition-Related Costs

        Acquisition-related costs include those costs related to the acquisition that would otherwise not have been incurred by the Company. These costs include professional and services fees, such as legal, audit, consulting, paying agent and other fees; and expenses related to cash payments to former NET executives under their NET change of control agreements.

        The components of acquisition-related costs included in our results of operations for the three and nine months ended September 28, 2012 are as follows (in thousands):

	Three months ended September 28, 2012		Nine months Ended September 28, 2012
Professional and services fees	$	2,048	$	3,015
Change of control agreements		2,042		2,042
	$	4,090	$	5,057

        The Company did not record any acquisition-related costs in either the three or nine months ended September 30, 2011.