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Note 5 - Fair Value

6 Months Ended

Sep. 28, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 5. FAIR VALUE

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The fair value of contingent consideration arising from the acquisitions of Altior Inc. (“Altior”) and Cadeka are classified within Level 3 of the fair value hierarchy since it is based on a probability-based approach that includes significant unobservable inputs. Due to a significant decrease in revenue projections during the quarter ended September 28, 2014, we reversed $3.9 million of contingent consideration as the payment of such consideration was no longer probable. The fair value of the contingent consideration from the acquisitions of Altior and Cadeka was fully released as of September 28, 2014.

We received approximately 93,000 common shares of CounterPath Corporation (“CounterPath”) through the dissolution of Skypoint in which we were a limited partner since 2001. CounterPath was one of the investee companies of Skypoint. We estimated the fair value using the market value of common shares as determined by trading on the Nasdaq Capital Market. These securities have been classified to Level 2 as of September 28, 2014 and recorded in the other non-current assets line item on the condensed consolidated balance sheet. We believe the fair value inputs of CounterPath do not meet all of the criteria for Level 1 classification primarily due to the low trading volume of the stock. See Note 7–“Long-term Investments” for the discussion on Skypoint.

There were no transfers between Level 1, Level 2, and Level 3 during the fiscal quarter ended September 28, 2014.

The following table summarizes our other investments assets and liabilities as September 28, 2014 (in thousands):

		September 28, 2014
		Level 1				Level 2				Level 3				Total
Assets:
Money market funds		$	2,000			$	—			$	—			$	2,000
Common shares of CounterPath			—				92				—				92
Total investment assets		$	2,000			$	92			$	—			$	2,092

As of March 30, 2014, our investment assets and liabilities, measured at fair value on a recurring basis, were as follows (in thousands):

		March 30, 2014
		Level 1				Level 2				Level 3				Total
Assets:
Money market funds		$	4,636			$	—			$	—			$	4,636
U.S. government and agency securities			9,378				13,134				—				22,512
State and local government securities			—				2,772				—				2,772
Corporate bonds and securities			5				71,248				—				71,253
Asset-backed securities			—				27,635				—				27,635
Mortgage-backed securities			—				28,248				—				28,248
Total investment assets		$	14,019			$	143,037			$	—			$	157,056

Liabilities:
Acquisition-related contingent consideration – Altior		$	—			$	—			$	2,973			$	2,973
Acquisition-related contingent consideration – Cadeka			—				—				1,370				1,370
Total liabilities		$	—			$	—			$	4,343			$	4,343

Our cash, cash equivalents and short-term marketable securities as of the dates indicated below were as follows (in thousands):

		September 28, 2014				March 30, 2014
Cash and cash equivalents
Cash at financial institutions		$	76,377			$	9,978
Restricted cash			26,000				—
Cash equivalents
Money market funds			2,000				4,636
Total cash and cash equivalents		$	104,377			$	14,614

Available-for-sale securities
U.S. government and agency securities		$	—			$	22,512
State and local government securities			—				2,772
Corporate bonds and securities			—				71,253
Asset-backed securities			—				27,635
Mortgage-backed securities			—				28,248
Total short-term marketable securities		$	—			$	152,420

Our marketable securities include U.S. government and agency securities, state and local government securities, corporate bonds and securities, asset-backed and mortgage-backed securities and certificates of deposit. We classify investments as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. We amortize premiums and accrete discounts to interest income over the life of the investment. Our available-for-sale securities, which we intend to sell as necessary to meet our liquidity requirements, are classified as cash equivalents if the maturity date is 90 days or less from the date of purchase and as short-term marketable securities if the maturity date is greater than 90 days from the date of purchase. As of September 28, 2014, $26.0 million of short-term certificate deposit was used as collateral against our CTBC Bank Corporation (USA) (“CTBC”) bridge loan and classified as restricted cash. See Note 9-“Short-term Debt”.

All marketable securities are reported at fair value based on the estimated or quoted market prices as of each balance sheet date, with unrealized gains or losses, net of tax effect, recorded in the condensed consolidated statements of other comprehensive income except those unrealized losses that are deemed to be other than temporary which are reflected in the impairment charges on investments line item on the condensed consolidated statements of operations.

Realized gains (losses) on the sale of marketable securities are determined by the specific identification method and are reflected in the interest income and other net, line item on the condensed consolidated statements of operations.

Our net realized gains (losses) on marketable securities for the periods indicated below were as follows (in thousands):

		Three Months Ended								Six Months Ended
		September 28, 2014				September 29, 2013				September 28, 2014				September 29, 2013
Gross realized gains		$	—			$	164			$	264			$	382
Gross realized losses			—				(131	)			(238	)			(408	)
Net realized income (losses)		$	—			$	33			$	26			$	(26	)

We did not have any unrealized gain (loss) as of September 28, 2014.

The following table summarizes our investments in marketable securities as of March 30, 2014 (in thousands):

		March 30, 2014
		Amortized Cost				Unrealized Gross Gains ⁽¹⁾				Unrealized Gross Losses ⁽¹⁾				Fair Value
Money market funds		$	4,636			$	—			$	—			$	4,636
U.S. government and agency securities			22,550				1				(39	)			22,512
State and local government securities			2,762				10				—				2,772
Corporate bonds and securities			71,309				32				(88	)			71,253
Asset-backed securities			27,661				22				(48	)			27,635
Mortgage-backed securities			28,362				24				(138	)			28,248
Total investments		$	157,280			$	89			$	(313	)		$	157,056

(1)

Gross of tax impact of $828

Our asset-backed securities as of March 31, 2014 were comprised primarily of premium tranches of vehicle loans and credit card receivables, while our mortgage-backed securities are primarily from Federal agencies. We did not own auction rate securities nor did we own securities that were classified as subprime.

Management determines the appropriate classification of cash equivalents or short-term marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and accretion of discounts to maturity and such accretion/amortization, which is immaterial for the period presented, is included in the interest income and other, net line in the condensed statements of operations. Cash equivalents and short-term marketable securities are reported at fair value with the related unrealized gains and losses included in the accumulated other comprehensive losses line in the condensed consolidated balance sheets.

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will not have to sell the security before recovery of its cost basis. For the three and six months ended September 28, 2014, no investments were identified with other-than-temporary declines in value. All investments were redeemed in the first quarter of fiscal 2015.

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale by expected maturity as of March 30, 2014 (in thousands):

		March 30, 2014
		Amortized Cost				Fair Value
Less than 1 year		$	49,539			$	49,504
Due in 1 to 5 years			107,741				107,552
Total		$	157,280			$	157,056

The following table summarizes the gross unrealized losses and fair values of our investments in an unrealized loss position as of March 30, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

		March 30, 2014
		Less than 12 months								12 months or greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
U.S. government and agency securities		$	18,245			$	(39	)		$	—			$	—			$	18,245			$	(39	)
Corporate bonds and securities			48,379				(87	)			596				(1	)			48,975				(88	)
Asset-backed securities			7,118				(12	)			5,478				(36	)			12,596				(48	)
Mortgage-backed securities			19,682				(120	)			983				(18	)			20,665				(138	)
Total		$	93,424			$	(258	)		$	7,057			$	(55	)		$	100,481			$	(313	)

The fair value of contingent consideration was determined based on a probability-based approach which includes projected revenues, percentage probability of occurrence and discount rate to present value payments. A significant increase (decrease) in the projected revenue, discount rate or probability of occurrence in isolation could result in a significantly higher (lower) fair value measurement. We calculate the fair value of the contingent consideration on a quarterly basis based on a collaborative effort of our operations and financial accounting groups based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period.

During the three months ended September 28, 2014, we measured the fair value of the contingent consideration liabilities for Altior and Cadeka acquisition based on a combination of income and market approach. Due to the significant decrease in revenue projection with the period in which such contingent consideration could be earned, we determined that the probability of revenue target achievement was highly unlikely. As a result, the fair value of the contingent consideration liabilities was reduced to zero.

The change in the fair value of our Altior purchase consideration liability is as follows (in thousands):

		Amount
As of March 30, 2014		$	2,973
Fair value adjustment			(2,973	)
As of September 28, 2014		$	—

The change in the fair value of our Cadeka purchase consideration liability is as follows (in thousands):

		Amount
As of March 30, 2014		$	1,370
Fair value adjustment			(1,370	)
As of September 28, 2014		$	—

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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