Note 3. Fair Values of Assets and Liabilities

9 Months Ended

Oct. 29, 2011

Fair Value Disclosures [Text Block]

3. Fair values of assets and liabilities

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”  The accounting standards establish a consistent framework for measuring fair value and disclosure requirements about fair value measurements and among other things, require us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Fair value hierarchy

The accounting standards discuss valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).  The standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The following is a brief description of those three levels:

▪ Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

▪ Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

▪ Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect our estimate of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Determination of Fair Value

Our cash equivalents and marketable securities are classified within Level 1 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 types of marketable securities valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, money market securities and certain corporate obligations with high credit ratings and an ongoing trading market.

Our foreign currency derivative instruments are classified as Level 2 because they are valued using quoted prices and other observable data of similar instruments in active markets.

In connection with our acquisition of CopperGate Communications, Ltd (“CopperGate”) in November 2009, we agreed to pay up to an aggregate of $5.0 million in cash to specified CopperGate employees if certain milestones are achieved over a specified period.  We estimated the fair value of this contingent consideration based on the probability that certain milestones would be met and the payments would be made as outlined in the acquisition agreement.  In developing these estimates, we utilized discounted cash flow models and considered the revenue projections and historical results of CopperGate.

The table below presents the balances of our assets and liabilities measured at fair value on a recurring basis as of October 29, 2011 and January 29, 2011 (in thousands):

	As of October 29, 2011
			Quoted Prices In Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Corporate bonds	$	100,465		100,465	$	—	$	—
Money market funds		17,280		17,280		—		—
US agency discount notes		6,700		6,700		—		—
Total cash equivalents and marketable securities		124,445		124,445		—		—
Restricted cash		1,770		1,770		—		—
Derivative instruments		63		—		63		—
Total assets measured at fair value	$	126,278	$	126,215	$	63	$	—

	As of January 29, 2011
			Quoted Prices In Active Markets for Identical Assets		Significant Observable  Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Corporate bonds	$	89,943	$	89,943	$	—	$	—
Money market funds		21,946		21,946		—		—
Corporate commercial paper		8,997		8,997		—		—
US agency discount notes		6,999		6,999		—		—
Certificate of deposit		3,900		3,900		—		—
Total cash equivalents and marketable securities		131,785		131,785		—		—
Restricted cash		1,616		1,616		—		—
Derivative instruments		85		—		85		—
Total assets measured at fair value	$	133,486	$	133,401	$	85	$	—
Accrued contingent payment for CopperGate acquisition	$	1,689		—		—	$	1,689

The following table represents a reconciliation of the change in the fair value measurement of the contingent liability for the nine months ended October 29, 2011 (in thousands):

	Contingent Liability
Beginning balance at January 29, 2011	$	1,689
Payment made		(1,689	)
Ending balance at October 29, 2011	$	—

Assets measured and recorded at fair value on a non-recurring basis

Our non-marketable convertible promissory note and preferred stock investments in privately held venture capital funded technology companies are recorded at cost and only adjusted to fair value if an impairment charge is recognized.  In fiscal 2009 and 2010, we purchased shares of preferred stock in a privately-held venture capital funded technology company at a total investment cost of $2.0 million and we purchased a convertible note receivable from the same company with a face value equal to the cost of $3.0 million, convertible into the issuer’s preferred stock under certain circumstances, bearing interest at a rate of 9% per annum which became callable on November 30, 2009.  During our second quarter of fiscal 2011, the issuer of the $3.0 million convertible promissory note and the $2.0 million of preferred stock determined that additional funding would be required to continue operations.  This convertible note receivable was classified within Level 3.  This issuer held discussions with various parties, and a third party made a preliminary offer to purchase substantially all of the issuer’s assets at a price that would not allow us to collect any amount on our investments.  Based on the available information, we determined that the value of our investments in this issuer had suffered an other-than-temporary decline in value.  Accordingly, at July 31, 2010, we recorded an impairment charge of $5.2 million to fully write-down the carrying value of the convertible promissory note, accrued interest and preferred stock investment due to our expected inability to recover any value from it.  Subsequently this issuer was liquidated in bankruptcy and we received no amounts.