Fair Value Measurement

3 Months Ended

Mar. 31, 2013

Fair Value Measurement

Fair Value Measurement

10.  Fair Value Measurement

The Company records certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair values based on that price it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.

The prescribed fair value hierarchy and related valuation methodologies are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, directly or indirectly, such as a quoted price for similar assets or liabilities in active markets.

Level 3—Inputs are unobservable and are only used to measure fair value when observable inputs are not available. The inputs reflect the entity’s own assumptions and are based on the best information available. This allows for the fair value of an asset or liability to be measured when no active market for that asset or liability exists.

The following table discloses the assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 and the basis for that measurement:

	Fair Value Measurement at March 31, 2013
(in thousands)	Total		Level 1		Level 2		Level 3
Money market	$	23,315	$	23,315	$	—	$	—
Contingent HCL-EMS acquisition consideration	1,891		—		—		1,891
	$	25,206	$	23,315	$	—	$	1,891

	Fair Value Measurement at December 31, 2012
(in thousands)	Total		Level 1		Level 2		Level 3
Money market	$	28,094	$	28,094	$	—	$	—
Contingent HCL-EMS acquisition consideration	2,046		—		—		2,046
	$	30,140	$	28,094	$	—	$	2,046

The changes in the fair value of the Level 3 liability for the three months ended March 31, 2013 are as follows:

	Contingent HCL-EMS acquisition consideration
(in thousands)	Three Months Ended March 31, 2013
Balance, Beginning of Period	$	2,046
Imputed Interest	12
Second year earn-out adjustment	(167		)
Balance, End of Period	$	1,891

The Company’s investment in overnight money market institutional funds, which amounted to $28.1 million and $23.3 million at December 31, 2012 and March 31, 2013, respectively, is included in cash and cash equivalents on the accompanying condensed consolidated balance sheets and is classified as a Level 1 input.

The acquisition of HCL-EMS includes a contingent consideration agreement that requires additional consideration to be paid by the Company following each of the first and second anniversaries of the HCL-EMS Closing Date, pursuant to an earn-out formula ranging from 7.5% to 15% of specified revenues from specified customers acquired, subject to set-off rights of the Company with respect to indemnities given by HCL-EMS under the HCL-EMS APA.  The fair value of the contingent consideration recognized was $3.4 million which was estimated by applying the income approach. The key assumptions include (a) a discount rate of 10.5% and (b) probability adjusted levels of revenue between approximately $12.6 million and $13.9 million. As of March 31, 2013, there were no changes in the recognized amounts, except for the accretion of interest and adjustment of the second year earn-out estimate to actual.

The carrying amounts of the Company’s other non-cash financial instruments including accounts receivable and accounts payable approximate their fair values due to the relatively short-term nature of these instruments. The carrying amounts of the Company’s deferred purchase price consideration to ProfitLine and Symphony approximate fair value as the effective interest rates approximate market rates.