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.

We measure our financial assets and liabilities at fair value on a recurring basis using the following valuation techniques:

(a) Market Approach – uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

(b) Income Approach – uses valuation techniques to convert future estimated cash flows to a single present amount based on current market expectations about those future amounts, using present value techniques.

Financial Assets Valued on a Recurring Basis

As of December 28, 2013 and December 29, 2012, 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 following table represents our fair value hierarchy and the valuation techniques used for financial assets measured at fair value on a recurring basis:

 

		As of December 28, 2013
		Total				Level 1				Level 2				Level 3				Valuation Techniques
Assets:
Cash and cash equivalents (1)		$	818			$	818			$	—			$	—			(a)
Investments – mutual funds (2)			47				47				—				—			(a)
		$	865			$	865			$	—			$	—

 

 

		As of December 29, 2012
		Total				Level 1				Level 2				Level 3				Valuation Techniques
Assets:
Cash and cash equivalents (1)		$	1,030			$	1,030			$	—			$	—			(a)
Investments – mutual funds (2)			110				110				—				—			(a)
		$	1,140			$	1,140			$	—			$	—

 

(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.

During fiscal year 2013 and 2012, there were no transfers into or out of Level 1 and Level 2 assets.

 

As of December 31, 2011, the Company had invested in ARPS, which were classified as long-term available-for-sale securities and reflected at $2,104 (fair value), which included an unrealized loss of $21. 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.The following tables present the Company’s ARPS activity measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during fiscal year 2012:

 

		Level 3 Investments
Balance as of December 31, 2011		$	2,104
Redemption at par value			(2,125	)
Realized gains			21
Balance as of December 29, 2012		$	—

Non-Financial Assets Valued on a Non-Recurring Basis

The Company’s long-lived assets, including intangible assets subject to amortization, 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 December 28, 2013, the Company’s long-lived assets did not indicate a potential impairment under the provisions of ASC 360. During the second quarter of 2013, the Company identified adverse events related to the Company’s overall financial performance, including the continued downward trend in the Company’s revenues and gross margin, and a sustained decline in the Company’s share price, that would more likely than not reduce the fair value of the Company’s long-lived assets below their carrying amount. The Company performed its impairment testing of long-lived assets, including intangible assets subject to amortization, in accordance with ASC 360. The Company recorded impairment losses on property and equipment and intangible assets of $4,832 and $1,245, respectively. The fair value measurements are categorized as Level 3 of the fair value hierarchy, as the Company developed its own assumptions and analysis to determine if such assets were impaired.

During the fourth quarter of 2012, the total impairment loss was $26,427. The Company recorded impairment losses on property and equipment, goodwill and intangible assets of $1,960, $18,854 and $5,613, respectively. The fair value measurements are categorized as Level 3 of the fair value hierarchy, as the Company developed its own assumptions and analysis to determine if such assets were impaired.

Refer to “Note 1 – Summary of Significant Accounting Policies and Nature of Operations,” “Note 4 – Property and Equipment, Net” and “Note 5 – Goodwill and Indefinite-Lived Intangibles” for additional details.