Financial Instruments

6 Months Ended

Jun. 30, 2011

Financial Instruments

Financial Instruments

5. Financial Instruments

The Company classifies debt and marketable equity securities based on the liquidity of the investment and management’s intention on the date of purchase, and re-evaluates such designation as of each balance sheet date. As of June 30, 2011, all debt and marketable equity securities are classified as available-for-sale and carried at estimated fair value, which is determined based on the inputs discussed below.

The Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. Except for one remaining auction rate security, the Company considers all investments that are available-for-sale with a maturity date of longer than three months to be short-term investments, including those investments with a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity. The auction rate security is designated as a long-term investment due to the maturity date being longer than one year and the security not being highly liquid in the current market.

Interest is included in interest and other expense, net in the accompanying condensed consolidated financial statements. Realized gains and losses are calculated using the specific identification method. The components of the Company’s debt and marketable equity securities classified as available-for-sale were as follows at June 30, 2011 (in thousands):

								Total Other
								Than Temporary
								Impairment		Gain (Loss) on
					Total Unrealized			Recorded In		Investments
					Losses in Other			Other		Recorded in the
	Amortized		Unrealized		Comprehensive			Comprehensive		Statement of		Estimated
June 30, 2011	Cost		Gains		Income (Loss)			Income (Loss)		Operations		Fair Value
Short-term investments:
Corporate notes and obligations	16,030		11		(22		)	—		—		16,019
U.S. government and agency obligations	25,060		3		(14		)	—		—		25,049
Publicly traded securities	375		—		(257		)	—		—		118
Long-term investments:
Auction rate security	800		—		(18		)	—		—		782
Investments in debt and equity securities	$	42,265	$	14	$	(311	)	$	—	$	—	$	41,968

At June 30, 2011, the Company had $22,000 and $14,000 of unrealized losses related to corporate notes and obligations and U.S government and agency obligations, respectively. The aggregate fair values of these investments were $11.9 million and $17.5 million, respectively. The Company also had $257,000 and $18,000 of unrealized losses related to its investment in one publicly traded equity security and one Auction Rate Security, respectively.

For investments in securities classified as available-for-sale, market value and the amortized cost of debt securities and estimated fair value of publicly traded equity securities have been classified in accordance with the following maturity groupings based on the contractual maturities of those securities as of June 30, 2011 (in thousands).

	Amortized Cost		Estimated Fair Value
Contractual maturity
Less than 1 year	$	21,645	$	21,385
1-2 years	19,820		19,801
More than 2 years	800		782
Total	$	42,265	$	41,968

The Company had no realized gains or losses on sales of its investments for the three and six months ended June 30, 2011 and 2010. The Company had proceeds of $2.5 million and $10.1 million from maturities and sales of investments for the three and six months ended June 30, 2011. All proceeds from sales and maturities of investments were equal to the par value of the securities.

The short term investments are either government obligations or highly rated credit securities and generally have minor to moderate fluctuations in the fair values from period to period. The short term fluctuations sometimes cause some of the individual securities to be impaired. The Company monitors credit ratings, downgrades and significant events surrounding these securities so as to assess if any of the impairments will be considered other-than-temporary.   Based on such evaluation, the Company did not identify impairment in any security to be other-than-temporary. Similar assessment for the long term investments and the publicly traded security is included below.

The Company did not identify any securities held as of June 30, 2011 for which the fair value declined significantly below amortized cost and that the decline would be considered other-than-temporary impairment (OTTI). Company does not intend to sell its auction rate security and it is not more-likely-than-not that the Company will be required to sell that security before recovery.

The Company measures financial assets at fair value on an ongoing basis. The estimated fair value of the Company’s financial assets was determined using the following inputs at June 30, 2011 and December 31, 2010 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2011	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	13,614	$	13,614	$	—	$	—
U.S. treasury bills (2)	6,518		6,518		—		—
Corporate notes and obligations (2)	16,018		—		16,018		—
U.S. government and agency obligations (2)	18,532		—		18,532		—
Publicly traded securities (2)	118		—		118		—
Auction-rate security (3)	782		—		—		782
Total	$	55,582	$	20,132	$	34,668	$	782

(1) Included in cash and cash equivalents on the consolidated balance sheet.

(2) Included in short-term investments on the consolidated balance sheet.

(3) Included in long-term investments on the consolidated balance sheet.

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2010	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	4,835	$	4,835	$	—	$	—
U.S. treasury bills (2)	6,493		6,493		—		—
Corporate notes and obligations (2)	9,267		—		9,267		—
U.S. government and agency obligations (2)	1,998		—		1,998		—
Publicly traded securities (2)	115		—		115		—
Auction-rate security (3)	787		—		—		787
Total	$	23,495	$	11,328	$	11,380	$	787

(1) Included in cash and cash equivalents on the consolidated balance sheet.

(2) Included in short-term investments on the consolidated balance sheet.

(3) Included in long-term investments on the consolidated balance sheet.

The table below presents the changes during the period related to balances measured using significant unobservable inputs (Level 3) (in thousands):

							Gain (Loss)
	Balance at						Recorded in					Balance at
	December 31,						Statement of		Unrealized			June 30,
	2010		Addition		Disposition		Operations		Gain (Loss)			2011
Auction rate securities classified as available for sale	$	787	$	—	$	—	$	—	$	(5	)	$	782
Total	$	787	$	—	$	—	$	—	$	(5	)	$	782

Valuation of Investments and Warrants

Level 1 and Level 2

The Company’s available-for-sale securities include corporate notes and obligations and U.S. government and agency obligations at June 30, 2011 and December 31, 2010. The Company values these securities using a pricing matrix from a reputable pricing service, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs).  However, the Company classifies all of its available-for-sale securities, except for U.S. treasury and certain auction rated securities, as having Level 2 inputs. The Company validates the estimated fair value received from the reputable pricing service on a quarterly basis.  The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data.

     In December 2009, the Company executed a “Subscription Agreement for Units” (“the Agreement”) with ForceLogix Technologies.  Pursuant to the Agreement, the Company purchased 2,639,000 units of ForceLogix Technologies for an aggregate of $250,000. Each unit consists of one common share and three quarters (3/4) of one common share purchase warrant of ForceLogix Technologies. In April 2010, the Company executed another “Subscription Agreement for Common Shares” with ForceLogix Technologies to purchase an additional 2,003,800 common shares of ForceLogix Technologies for a total of $150,000.  As discussed in Note 3, the Company purchased all of the common stock of ForceLogix, Inc., the subsidiary of ForceLogix Technologies in February 2011.  In March 2011, as required by the Asset Purchase Agreement between the Company and ForceLogix Technologies; ForceLogix Technologies changed its name to Courtland Capital Inc. The Company owns approximately 5% of the outstanding common shares of Courtland Capital Inc. as of June 30, 2011 and does not have the ability to exercise significant influence.

The fair value of the common share purchase warrant is zero as of June 30, 2011, mainly due to purchase price under the warrant being significantly higher than the current market price. Refer to Note 2 of our Notes to Consolidated Financial Statements for information regarding the Company’s acquisition of ForceLogix in February 2011.

Due to the reduced trading volume of Courtland Capital Inc.’s common shares on the TSX Venture Exchange, the Company considered that the share price no longer qualified for Level 1 inputs which are defined as quoted prices in active markets.

Level 3

As of June 30, 2011, the Company has one auction rate security remaining, which is classified as available-for-sale and is carried at its fair value of approximately $782,000.

The Company valued its auction rate security using unobservable inputs (Level 3). The Company utilized the income approach applying assumptions for interest rates using current market trends and an estimated term based on expectations from brokers for liquidity in the market and redemption periods agreed to by other broker-dealers.  The Company also applied an adjustment for the lack of liquidity to the value determined by the income approach utilizing a put option model. As a result of the valuation assessment, $5,000 of unrealized loss was recorded on the Company’s auction rate securities classified as available-for-sale for the three and six months ended June 30, 2011.