NOTE 3 — BUSINESS COMBINATION:

On July 1, 2013, the Company completed its acquisition of a privately held company, IPtronics A/S. On August 15, 2013, the Company completed its acquisition of a privately held company, Kotura, Inc. The Company’s primary reasons for the IPtronics and Kotura acquisitions was to enhance its ability to deliver cost-effective, high-speed networks with next generation optical connectivity at 100Gb/s and beyond. The acquisitions also enhanced the Company’s engineering team and added a strong patent portfolio in the field of silicon photonics.

The following table presents details of the purchase consideration related to each acquisition:

Company Acquired	Cash Consideration Paid		Cash Assumed		Net Cash Paid
	(in thousands)
IPtronics	$	44,925	$	2,077	$	42,848
Kotura	80,772		101		80,671
Total	$	125,697	$	2,178	$	123,519

In conjunction with the IPtronics acquisition, the Company issued 60,508 restricted stock units (“RSUs”) of the Company’s ordinary shares with an aggregate value of $3.0 million in exchange for RSUs of IPtronics. The fair value of the RSUs is based on the closing price of the Company’s ordinary shares on July 1, 2013 of $49.92. The RSU grants will result in compensation expense of $3.0 million which will be recognized over the vesting period of four years.

In conjunction with the Kotura acquisition, the Company issued options to purchase 31,653 shares of the Company’s ordinary shares and 145,425 RSUs of the Company’s ordinary shares with an aggregate value of $6.4 million, in exchange for options to purchase shares and RSUs of Kotura. This grant will result in compensation expense of $6.4 million which will be recognized over the remaining vesting period of these equity awards, which ranges from one day to four years.

The fair value of the exchanged options was determined using a Black-Scholes valuation model with the following weighted-average assumptions: expected life of 4.72 years, volatility of 57.5%, risk-free interest rate of 1.54%, and dividend yield of zero. The fair value of the exchanged RSUs was determined based on the per share value of the underlying Company ordinary shares of $42.19 per share at August 15, 2013.

The Company accounted for both transactions using the acquisition method, and accordingly, the consideration has been allocated to tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the respective acquisition date. The Company’s preliminary allocation of the total purchase price for each transaction is summarized below:

	IPtronics			Kotura			Total
	(in thousands)
Current assets, net of cash	$	2,534		$	5,606		$	8,140
Other long-term assets	974			10,603			11,577
Intangible assets	17,229			27,517			44,746
Goodwill	25,630			40,681			66,311
Total assets	46,367			84,407			130,774
Current liabilities	(2,668		)	(3,357		)	(6,025		)
Long-term liabilities	(851		)	(379		)	(1,230		)
Total liabilities	(3,519		)	(3,736		)	(7,255		)
Total purchase price allocation	$	42,848		$	80,671		$	123,519

The preliminary estimates above are subject to change once the Company receives certain information it believes is necessary to finalize its determination of the fair value of assets acquired and liabilities assumed under the acquisition.

Identifiable intangible assets

Intangible assets acquired and their respective estimated remaining useful lives over which each asset will be amortized are:

	Fair value		Weighted Average Useful life
	(in thousands)		(in years)
Purchased intangible assets:
Licensed technology	$	135	6
Developed technology	27,701		5
In-process research and development	13,764		—
Customer relationship	2,420		1-2
Backlog	726		Less than 1
Total purchased intangible assets	$	44,746

Developed technology represents completed technology that has reached technological feasibility and/or is currently offered for sale to customers. The Company used the income approach to value the developed technology. Under the income approach, the expected future cash flows from each technology are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital and the return on assets. The Company applied a discount rate of 17.5% for IPtronics and 15.5% for Kotura to value the developed technology assets taking into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.

In-process research and development (“IPR&D”) represents projects that have not yet reached technological feasibility. Technological feasibility is defined as being equivalent to completion of a beta-phase working prototype in which there is no remaining risk relating to the development. As of the acquisition date, IPtronics was involved in research and development projects related to its laser-drivers, modulator-drivers, and trans-impedance-amplifier for 25Gb/s, enabling fast communication at 4x25Gb/s for interconnect solutions. Each of these projects is focused on developing and later on integrating new technologies while broadening features and functionalities. There is a risk that these development efforts and enhancements will not be competitive with other products on cost and functionality.

As of the acquisition date, Kotura was involved in research and development projects related to its silicon photonics modulator for 25Gb/s, enabling fast communication at 4x25Gb/s and wavelength-division multiplexing “WDM” for interconnect products. Each of these projects is focused on developing and later on integrating new technologies and broadening features and functionalities. There is a risk that these development efforts and enhancements will not be competitive with other products using alternative technologies that offer comparable functionality.

Upon successful completion of the development process for the acquired IPR&D projects, the assets will then be considered finite-lived intangible assets and amortization of the assets will commence. None of the projects has been completed as of December 31, 2013.

The following table summarizes the significant assumptions underlying the valuations of IPR&D at acquisition:

Company	Development Projects	Average Estimated time to complete	Estimated cost to complete		Risk Adjusted Discount Rate		Fair value
		(in months)	(in thousands)		(%)		(in thousands)
IPtronics	Modulator drivers - 4x25Gb/s	18	$	9,549	19.5	%	$	4,121
Kotura	Silicon photonics modulator - 4x25Gb/s	18	17,210		16.5	%	9,643
			$	26,759			$	13,764

Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to existing customers of the acquired company. The Company used the comparative method (“with/without”) of the income approach to determine the fair value of this intangible asset and utilized a discount rate of 15.5%.

Backlog represents the fair value of sales order backlog as of the valuation date. The Company used the income approach to determine the fair value of this intangible asset.

The goodwill arising from these acquisitions is primarily attributed to sales of future products and the assembled workforce. Goodwill is not deductible for tax purposes. Goodwill is not being amortized but is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with authoritative guidance.

The following table presents certain unaudited pro forma information for illustrative purposes only, for fiscal 2013 and fiscal 2012 as if IPtronics and Kotura had been acquired on January 1, 2012. The unaudited estimated pro forma information combines the historical results of IPtronics and Kotura with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisitions taken place on January 1, 2012. Additionally, the pro forma financial information does not include the impact of possible business model changes between IPtronics, Kotura and the Company. The Company expects to achieve further business synergies, as a result of the acquisitions that are not reflected in the pro forma amounts that follow. As a result, actual results will differ from the unaudited pro forma information presented (in thousands, except per share data):

	Year Ended
	December 31, 2013			December 31, 2012
	(in thousands, except per share data)
Pro forma net revenue	$	402,107		$	521,780
Pro forma net income (loss)	$	(30,613	)	$	100,748
Pro forma net income (loss) per share basic	$	(0.71	)	$	2.44
Pro forma net income (loss) per share diluted	$	(0.71	)	$	2.29

On February 7, 2011, the Company acquired Voltaire Ltd. (“Voltaire”), an Israeli-based public company.

The Company’s allocation of the total purchase price is summarized below (in thousands):

Purchase price allocation:
Current assets	$	52,131
Other long-term assets	10,875
Intangible assets	36,052
Goodwill	132,885
Total assets	231,943
Current liabilities	(11,369		)
Long-term liabilities	(6,606		)
Total liabilities	(17,975		)
Total purchase price	$	213,968

Intangible assets acquired and their respective estimated remaining useful lives over which each asset would be amortized were:

	Fair value		Weighted average useful life
	(in thousands)		(in years)
Developed technology	$	20,378	2-3
In-process research and development	2,754		—
Customer relationship	10,956		4-5
Customer contract	1,529		2
Backlog	435		Less than 1
Total acquired intangible assets	$	36,052

In-process research and development (“IPR&D”) represents projects that had not yet reached technological feasibility. Technological feasibility is defined as being equivalent to completion of a beta-phase working prototype in which there is no remaining risk relating to the development. Acquired IPR&D consisted of three projects: Unified Fabric Manager, or “UFM”, Acceleration software and Ethernet. Each of these projects is focused on integrating new technologies, improving product performance and broadening features and functionalities. The Acceleration software and Ethernet projects were completed during the year ended December 31, 2011. The UFM project was completed during the second quarter of 2012.

The goodwill recognized from the acquisition of Voltaire resulted primarily from the Company’s anticipated enhanced position in providing end-to-end connectivity solutions, expanding its software and hardware offerings and strengthening its engineering team and sales force. Goodwill is not being amortized but instead will be tested for impairment annually or more frequently if certain indicators are present. Goodwill is not expected to be deductible for tax purposes.