Acquisition

December 12, 2016,

the Company completed the acquisition of ClariPhy Communications, Inc. for

$303,661

in cash. The Company acquired ClariPhy to provide a complete coherent platform to the Company’s customers in long haul, metro, and datacenter interconnect applications. Cash of

$30,000

was placed in an escrow fund for up to

months following the closing for the satisfaction of certain potential indemnification claims. The consolidated financial statements include the results of operations of ClariPhy as of the acquisition date.

The acquisition has been accounted for using the purchase method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company allocated the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of acquisition. As additional information becomes available, such as finalization of the estimated fair value of tax related items, the Company

may

revise the preliminary purchase price allocation during the measurement period (which will

not

exceed

months from the acquisition date). Any such revisions or changes

may

be material as the Company finalizes the fair values of the tangible and intangible assets acquired and liabilities assumed.

The following table summarizes the purchase price allocation:

	Preliminary Allocation			Allocation Adjustments			Final Allocation
Cash	$	7,417		$	—		$	7,417
Receivables		2,552			602			3,154
Inventories		13,774			—			13,774
Other current assets		2,739			(123	)		2,616
Property and equipment		6,163			—			6,163
Identifiable intangible assets		138,558			—			138,558
In-process research and development		97,340			—			97,340
Other noncurrent assets		753			—			753
Accounts payable, accrued expenses and other current liabilities		(13,667	)		2			(13,665	)
Deferred tax liabilities, noncurrent		(42,958	)		94			(42,864	)
Other liabilities		(5,647	)		—			(5,647	)
Total identifiable net assets		207,024			575			207,599
Goodwill		96,637			(575	)		96,062
Net assets acquired	$	303,661		$	—		$	303,661

As of the acquisition date, the fair value of receivables, other assets, accounts payable, accrued expenses and other liabilities approximated the book value acquired.

The following table summarizes the estimated fair value of intangible assets and their estimated useful lives as of the date of acquisition:

	Estimated Fair Value		Estimated Useful Life (Years)
Developed technology	$	66,450		1	-	6
Customer relationships		62,370			7
Trade name		1,390			5
Software		8,348		1	-	3
In-process research and development		97,340			—
	$	235,898

Developed technology was valued using the multi-period excess earnings method under the income approach. This method involves discounting the direct cash flow expected to be generated by the technologies over their remaining lives, net of returns on contributory assets. The estimated useful life was determined based on the technology cycle related to each product family and its expected contribution to forecasted revenue. Customer relationships were valued using the incremental cash flow approach which involved discounting management’s estimate of the incremental revenues afforded by having the existing customer relationships in place as of the acquisition date, net of operating expense, taxes and returns on contributory assets. The estimated useful life was determined based on the estimated customer product or program ramp-up period required to develop the similar existing customer revenue base. Trade name was valued based on application of relief-from-royalty approach under the income approach. This method is based on the application of a royalty rate to forecasted revenue. The estimated useful life was determined based on the expected life of the trade names, the history of the trade names and the cash flows anticipated over the forecasted periods. In-process research and development was valued using the multi-period excess earnings method under the income approach, with the additional inclusion of estimated costs required to complete the projects.

The Company capitalized

$97,340

of IPR&D costs related to the ClariPhy acquisition. Upon completion of the remaining project, the related IPR&D assets will be amortized over their estimated useful lives. If the project is abandoned, the Company will be required to impair the related IPR&D asset. The following table summarizes the details of the IPR&D:

Description	IPR&D		Percentage of Completion			Estimated Cost to Complete		Expected Release Date

M200	$	60,500		67	%	$	12,064		2018

Lightspeed III		36,840		26	%		39,176		2019

Discount rates of

17%

20%

were applied to the projected cash flows to reflect the risk related to these IPR&D projects.

During the year ended

December 31, 2017,

the Company abandoned the Lightspeed III project resulting in an impairment charge of

$47,014,

of which

$10,174

was included in the cost of revenue and

$36,840

was included in the research and development expenses in the consolidated statements of income (loss). The abandonment of the project was primarily related to change in product roadmap that occurred during the year ended

December 31, 2017.

During the year ended

December 31, 2018,

the Company reclassified

$60,500

of acquired in-process research and development to developed technology as the technology was commercialized.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and is attributable to the work force of ClariPhy, the Company’s going concern value with the opportunity to leverage its work force to develop new technologies and the ability of the Company to grow the business faster and more profitable than was possible by ClariPhy as a stand-alone company. Goodwill is

not

amortized and is

not

deductible for tax purposes.

The Company incurred acquisition costs of

$1,738

which are included in general and administrative expense in the consolidated statement of income for the year ended

December

31,

2016.

ClariPhy contributed revenue of

$1,128

and pre-tax loss of

$2,361

to the Company for the period from

December 12, 2016

December 31, 2016.

Pro Forma Information

The following unaudited pro forma financial information presents a summary of the Company’s consolidated results of operations for the year ended

December 31, 2016,

assuming the ClariPhy acquisition had been completed as of

January 1, 2015.

The pro forma information includes adjustments to amortization and depreciation for intangible assets and property and equipment acquired, amortization of the purchase accounting effect on inventory acquired from ClariPhy, interest income for reduction in short-term investments to fund the acquisition and interest expense from assumed debt issued to fund the acquisition.

	Pro Forma Year Ended December 31, 2016
	(unaudited)
Revenue	$	304,820
Net income	$	48,481
Earnings per share – basic	$	1.20
Earnings per share – diluted	$	1.10

The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the historical financial information of the Company and ClariPhy, reflecting the results of operations for the year ended

December 31, 2016.

The unaudited pro forma consolidated results are

not

necessarily indicative of what the Company’s consolidated results of operations actually would have been had the Company completed the acquisition as of the beginning of the period presented. In addition, the unaudited pro forma consolidated results do

not

purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisition.