Fair Value of Financial Instruments

12 Months Ended

Jun. 30, 2014

Fair Value of Financial Instruments

Note 13. Fair Value of Financial Instruments

The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:

· Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.

· Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.

· Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurements.

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. At June 30, 2014, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts. During fiscal year 2014, the Company settled a contingent earnout arrangement related to the acquisition of LightWorks in the amount of $3.0 million. The LightWorks earnout arrangement provided up to a maximum of $4.2 million of additional cash payments to the former shareholders based upon LightWorks achieving certain agreed upon financial targets for revenues and customer orders in calendar year 2013. The fair value of the earnout arrangement was based on significant inputs not observable in the market and represented a Level 3 measurement. Included in Other expense (income), net for the year ended June 30, 2014 is a $0.3 million unrealized gain due to a fair value remeasurement that reduced the earnout liability. The following table provides a summary by level of the fair value of financial instruments that are measured on a recurring basis as of June 30, 2014 ($000):

	Fair Value Measurements at June 30, 2014 Using:
			Quoted Prices in
			Active Markets		Significant
			for Identical		Other Observable		Significant Unobservable
	June 30,2014		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Liabilities:
Contingent Earnout Arrangement	$	-	$	-	$	-	$	-
Foreign currency forward contracts	$	54	$	-	$	54	$	-

	Fair Value Measurements at June 30, 2013 Using:
			Quoted Prices in
			Active Markets		Significant
			for Identical		Other Observable		Significant Unobservable
	June 30,2013		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Liabilities:
Contingent Earnout Arrangement	$	3,300	$	-	$	-	$	3,300
Foreign currency forward contracts	$	23	$	-	$	23	$	-

The Company’s policy is to report transfers into and out of Levels 1 and 2 of the fair value hierarchy at fair values as of the beginning of the period in which the transfers occur. There were no transfers in and out of Levels 1 and 2 of the fair value hierarchy during fiscal years 2014 and 2013.

The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s Level 3 contingent earnout arrangement related to the acquisition of LightWorks:

	Significant Other
	Unobservable Inputs
	(Level 3)
Balance at June 30, 2013	$	3,300
Payment of earnout arrangement		(3,000	)
Changes in fair value		(300	)
Balance at June 30, 2014	$	-

The carrying value of cash and cash equivalents, accounts receivable and accounts payable are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings are considered Level 2 among the fair value hierarchy and are variable interest rates and accordingly their carrying amounts approximate fair value.