Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
 9 Months Ended
Sep. 29, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements

Note 3 – Fair Value Measurements

Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

Provisions of ASC 820 establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1 – Observable inputs such as quoted prices in active markets;

Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 – Unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

Financial Assets Valued on a Recurring Basis

As of September 29, 2012 and December 31, 2011, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included the Company’s financial instruments, including cash and cash equivalents and investments. The Company measures the following financial assets at fair value on a recurring basis. The fair value of these financial assets was determined using the following inputs (in thousands):

 

                                 
    As of September 29, 2012  
    Total     Level 1     Level 2     Level 3  

Assets:

                                

Cash and cash equivalents (1)

   $ 1,076     $ 1,076     $ —       $ —    

Investments – mutual funds (2)

     99       99       —         —    
   

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 1,175     $ 1,175     $ —       $ —    
   

 

 

    

 

 

    

 

 

    

 

 

  
   
    As of December 31, 2011  
    Total     Level 1     Level 2     Level 3  

Assets:

                                

Cash and cash equivalents (1)

   $ 10,335     $ 10,335     $ —       $ —    

Investments – mutual funds (2)

     1,125       1,125       —         —    

Investments – ARPS (3)

     2,104       —         —         2,104  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 13,564     $ 11,460     $ —       $ 2,104  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

(1)

Cash equivalents consist primarily of money market funds and short-term investments with original maturity dates of three months or less at the date of purchase, for which the Company determines fair value through quoted market prices.

(2) 

Investments consist of mutual funds, classified as short-term investments available-for-sale and recorded at fair market value, based on quoted prices of identical assets that are trading in active markets as of the end of the period for which the values are determined.

(3)

As of December 31, 2011, the Company had invested in ARPS, which were classified as long-term available-for-sale securities and reflected at $2.1 million (fair value), which included an unrealized loss of $21,000. The Company has included its investments related to ARPS in the Level 3 category. During the second quarter of 2012, the remaining ARPS balance at December 31, 2011 was fully redeemed at par.

 

Before utilizing Level 3 inputs in the fair value measurement of our ARPS, the Company considered significant Level 2 observable inputs of similar assets in active and inactive markets. These investments consisted solely of collateralized debt obligations supported by municipal and state agencies; did not include mortgage-backed securities or student loans; had redemption features that called for redemption at 100% of par value; and had a credit rating of A or AAA. The Company fully redeemed its investment at par value during the second quarter of 2012. As of December 31, 2011, we classified our ARPS as long-term due to the historical uncertainties at that time. The fact that there was not an active market to liquidate these investments was a determining factor in classifying them as Level 3. Due to the uncertainty with regard to the short-term liquidity of these securities, the Company determined that it could not rely on par value to represent fair value. Therefore, the Company estimated the fair values of these securities utilizing a discounted cash flow valuation model. On a quarterly basis we evaluated the reasonableness of the significant unobservable inputs used in our ARPS fair value measurements. The valuation model used for our ARPS investments required an evaluation of the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation the security will have a successful auction or market liquidity. These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company. Based on these factors, we assessed the risk of realizing expected cash flows and we applied an estimated term and observable discount rate that reflected this risk. As a result of the temporary declines in fair value for the Company’s ARPS, the Company recorded an unrealized holding loss of $21,000 to accumulated other comprehensive income as of December 31, 2011. If the Company had determined that any decrease in the value of the instruments was other-than-temporary, it would have recorded a charge to earnings as appropriate.

During the thirty-nine weeks ended September 29, 2012 and October 1, 2011, there were no transfers into or out of Level 1, Level 2 or Level 3 assets. The following tables present the Company’s ARPS activity measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the thirty-nine weeks ended September 29, 2012 and October 1, 2011 (in thousands):

 

         
    Level 3
Investments		  

Balance as of December 31, 2011

   $ 2,104  

Redemption at par value

     (2,125 )

Unrealized gains included in other comprehensive income

     21  
   

 

 

  

Balance as of September 29, 2012

   $ —    
   

 

 

  
   
    Level 3
Investments		  

Balance as of January 1, 2011

   $ 4,141  

Redemption at par value

     (2,100 )

Unrealized gains included in other comprehensive income

     63  
   

 

 

  

Balance as of October 1, 2011

   $ 2,104  
   

 

 

  

Non-Financial Assets Valued on a Non-Recurring Basis

The Company’s long-lived and indefinite-lived assets are measured at fair value on a non-recurring basis. These assets are measured at cost but are written-down to fair value, if necessary, as a result of impairment.

As of September 29, 2012, the Company’s long-lived and indefinite-lived assets did not indicate a potential impairment under the provisions of ASC 350 and ASC 360, as such, they were not measured at fair value. The Company did not recognize any impairment losses on long-lived or indefinite-lived assets during the thirty-nine weeks ended September 29, 2012 and October 1, 2011. If such non-financial assets had been measured at fair value, they would be categorized in Level 3 of the fair value hierarchy, as the Company would be required to develop its own assumptions and analysis to determine if such non-financial assets were impaired.

As of December 31, 2011, the Company recorded an impairment loss on certain acquired trade name intangible assets in the amount of $5.1 million, which adjusted such assets to their fair value at that time. The Company utilized the Royalty Savings method to determine the fair value of the trade name intangible assets using a discounted rate of 18.5% and a royalty rate of 1.0%, thus it is categorized as Level 3 in the fair value hierarchy.