NOTE 4—FINANCIAL INSTRUMENTS

Investments in Debt and Equity Securities

The fair values of the Company's available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities—short-term and available-for-sale securities—long-term on the Company's Condensed Consolidated Balance Sheets based on each respective security's maturity.

As described in further detail in Note 2. "Acquisition", during the second quarter of 2012, the Company liquidated the majority of its available-for-sale securities to finance the Acquisition. The available-for-sale securities were sold for total cash consideration of $52.0 million and the resulting net gain on sale of $0.5 million was recognized in Interest income and other, net in the accompanying Condensed Consolidated Statements of Operations.

The following is a summary of available-for-sale securities as of September 30, 2012 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
U.S. government obligations and agency securities	$	7,297	$	65	$	-	$	7,362
U.S. corporate debt		648		15		-		663
Foreign corporate debt and equity securities		1,849		38		-		1,887
Total available-for-sale securities	$	9,794	$	118	$	-	$	9,912

The following is a summary of available-for-sale securities as of December 31, 2011 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government obligations and agency securities	$	19,421	$	177	$	-		$	19,598
U.S. corporate debt		24,942		259		(101	)		25,100
Foreign government obligations and agency securities		2,805		6		(1	)		2,810
Foreign corporate debt and equity securities		15,157		41		(268	)		14,930
Total available-for-sale securities	$	62,325	$	483	$	(370	)	$	62,438

Contractual maturities of available-for-sale securities as of September 30, 2012 and December 31, 2011 are as follows (in thousands):

	September 30,		December 31,
	2012		2011
Less than one year	$	2,575	$	7,937
One to two years		5,717		25,785
More than two years		1,620		28,716
Total available-for-sale securities	$	9,912	$	62,438

The Company recognized no significant net realized gains and losses during the three months and nine months ended September 30, 2011. Realized gains and losses are included in Interest income and other, net in the accompanying Condensed Consolidated Statements of Operations.

Non-Marketable Securities

As of September 30, 2012 and December 31, 2011, the carrying amounts of the Company's non-marketable securities, totaling $5.0 million, equaled their estimated fair values. The estimated fair value was primarily determined to be the initial cost basis plus the Company's allocated share of results and any other-than-temporary impairment ("OTTI") charges that were recognized in prior periods. There was no OTTI recognized during the nine months ended September 30, 2012. During the nine months ended September 30, 2011, the Company recognized an impairment of $1.3 million in Interest income and other, net related to its investment in a limited partnership investment fund. Net investment results are included in interest income and other, net in the accompanying Condensed Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment portfolio in the future.

Derivative Financial Instruments

The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets is held in the nonfunctional currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company's foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company's accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company recognizes derivatives on its accompanying Condensed Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in other comprehensive income ("OCI") until the hedged item is recognized in earnings. As of September 30, 2012, the Company's existing foreign currency forward exchange contracts mature within 12 months. The deferred amount related to the Company's derivatives currently recorded in OCI and expected to be recognized into earnings over the next 12 months is a net loss of $0.6 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in OCI associated with such derivative instruments are reclassified immediately into operations through other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and nine months ended September 30, 2012 and 2011.

Under the Credit Agreement as defined in Note 9. "Long-Term Obligations", the Company is required to maintain derivative contracts to protect against fluctuations in interest rates with respect to at least 35% of the aggregate principal amount of the Term Loan, as defined in Note 9. "Long-Term Obligations," then outstanding, with such derivative contracts being required to have at least a three-year term. Accordingly, the Company has entered into an interest rate swap (the "Interest Rate Swap") for which the notional amount was originally set at $27 million, with quarterly reduction to the notional amount consistent with the mandatory amortization schedule of the Term Loan. The Interest Rate Swap calls for quarterly fixed rate quarterly payments of 1.70% of the notional amount in exchange for a variable rate quarterly receipts equal to a 3 month LIBOR rate with a floor of 1.50%. The Interest Rate Swap terminates on June 25, 2015.

The Company did not designate the Interest Rate Swap as a hedging instrument and will recognize adjustments to fair value through Interest and other income on the accompanying Condensed Consolidated Statements of Operations at each reporting date. As of September 30, 2012, the fair value of the Interest Rate Swap was $0.1 million.

As of September 30, 2012 and December 31, 2011, the total notional values of the Company's derivative assets and liabilities were as follows (in thousands):

	September 30,		December 31,
	2012		2011
Euro	$	17,510	$	11,851
Japanese yen		10,619		7,008
British pound		5,043		4,459
Interest rate swap		27,519		-
Total	$	60,691	$	23,318

Other than the Interest Rate Swap, the Company did not have any derivative assets or liabilities that were not designated or qualifying as hedges as of September 30, 2012. As of December 31, 2011, the Company did not have any derivative assets or liabilities that were not designated or qualifying as hedges.

As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties may be unable to meet the terms of the underlying agreements. To mitigate this risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred; however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into derivative contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.

The following table shows the Company's derivative assets and liabilities measured at fair value as reflected on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (in thousands):

	September 30,		December 31,		Balance Sheet
	2012		2011		Location
Derivative assets:
Foreign exchange contracts	$	199	$	940	Other current assets
Derivative liabilities:
Foreign exchange contracts		812		217	Accrued expenses
Interest rate swap		74		-	Accrued expenses

The following table shows the effect, net of tax, of the Company's derivative instruments on the accompanying Condensed Consolidated Statements of Operations and OCI for the three and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Derivatives in cash flow hedging relationships:
Net (loss) gain recognized in OCI, net of tax (1)	$	(1,204	)	$	353			(1,472	)		303
Net gain reclassified from accumulated OCI into income, net of tax (2)		140			-			837			-
Net gain (loss) recognized in other income and expense (3)		40			(66	)		68			(79	)
Derivatives not designated as hedging relationships:
Net (loss) gain recognized in other income and expense (4)		(353	)		625			(479	)		(1,892	)

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(1)	Net change in the fair value of the effective portion classified in OCI

(2)	Effective portion classified as revenue

(3)	Ineffective portion and amount excluded from effectiveness testing classified as Interest and other, net

(4)	Classified in Interest and other, net