v2.4.0.6
Financial Instruments
 3 Months Ended
Dec. 28, 2012
Financial Instruments

2. FINANCIAL INSTRUMENTS

Financial liabilities measured at fair value on a recurring basis consist of the following (in thousands):

 

     December 28, 2012  
     Fair
Value		      Active
Markets
for
Identical
Assets
(Level 1)		      Observable
Inputs
(Level 2)		      Unobservable
Inputs
(Level 3)		  

Contingent consideration

    $ 405       $ —         $ —         $ 405   
  

 

 

     

 

 

     

 

 

     

 

 

  

Common stock warrant liability

    $ 9,587       $ —         $ —         $ 9,587   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

     September 28, 2012  
     Fair
Value		      Active
Markets
for
Identical
Assets
(Level 1)		      Observable
Inputs
(Level 2)		      Unobservable
Inputs
(Level 3)		  

Contingent consideration

    $ 6,580       $ —         $ —         $ 6,580   
  

 

 

     

 

 

     

 

 

     

 

 

  

Common stock warrant liability

    $ 7,561       $ —         $ —         $ 7,561   
  

 

 

     

 

 

     

 

 

     

 

 

  

The changes in financial liabilities with inputs classified within Level 3 of the fair value hierarchy consist of the following (in thousands):

 

     Three Months Ended December 28, 2012  
     September 28,
2012		      Net  Realized/
Unrealized
Losses  (Gains)
Included in
Earnings		     Purchases
and
Issuances		      Sales and
Settlements		     Transfers in
and/or (out)
of Level 3		      December 28,
2012		  

Contingent consideration

    $ 6,580       $ (172 )    $ —         $ (6,003 )    $ —         $ 405   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Common stock warrant liability

    $ 7,561       $ 2,026      $ —         $ —        $ —         $ 9,587   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  
     Three Months Ended December 30, 2011  
     September 30,
2011		      Net Realized/
Unrealized
Losses (Gains)
Included in
Earnings		     Purchases
and
Issuances		      Sales and
Settlements		     Transfers in
and/or  (out)
of Level 3		      December 30,
2011		  
       

 

 

       

 

 

     

Contingent consideration

    $ 25,502       $ 169      $ —         $ (15,000 )    $ —         $ 10,671   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Common stock warrant liability

    $ 10,736       $ (1,458 )    $ —         $ —        $ —         $ 9,278   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Class B conversion liability

    $ 81,378       $ (13,620 )    $ —         $ —        $ —         $ 67,758   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

The fair values of the contingent consideration liabilities were estimated based upon a risk-adjusted present value of the probability-weighted expected payments by the Company. Specifically, the Company considered base, upside and downside scenarios for the operating metrics upon which the contingent payments are to be based. Probabilities were assigned to each scenario and the probability-weighted payments were discounted to present value using risk-adjusted discount rates. We paid Cobham Defense Electronic Corporation (Cobham) a final payment of $6.0 million for the final earn-out period ending September 30, 2012 in November 2012 and no further amounts are owed under the arrangement.

The maximum aggregate earn-out potentially payable by us to the former stockholders and option holders of Optomai, Inc., which was acquired in April 2011, is $16.0 million for the second annual earn-out period ending March 30, 2013. The Company did not make any payment related to the first earn-out period that expired on March 31, 2012 and it is uncertain whether any amount related to the second earn-out period that expires on March 31, 2013 will be paid.

For periods prior to March 2012, the fair value of the common stock warrants was estimated based upon a present value of the probability-weighted expected investment returns to the holders. The Company weighted various scenarios of possible investment returns to the holders over the terms of the contracts, such as upon a sale of the Company and upon an initial public offering of its common stock, using a range of potential outcomes. Using the scenarios developed, management considered the likely timing and method of exercise of the warrants and investment returns to the holders. Where a settlement was considered likely in the near term, the probable settlement amounts were weighted. Where the time to exercise was expected to be longer, a Black-Scholes option pricing model was used to estimate the fair value of the warrants, giving consideration to remaining contractual life, expected volatility and risk free rates. The probability-weighted expected settlement of the warrant was discounted to the present using a risk adjusted discount rate. As of December 28, 2012, the fair value of the common stock warrants has been estimated using a Black-Scholes option pricing model giving consideration to the quoted market price of the common stock on that date, an expected life of 8.0 years, expected volatility of 42.6% and risk free rate of 1.4%. The change in approach to estimation results from the Company’s IPO in March 2012 and the availability of a quoted market price for the common stock underlying the warrants.

The fair values of the Class B conversion liabilities were estimated based upon a consideration of the estimated fair value of the underlying common stock into which the Company’s Class B convertible preferred stock (Class B) was convertible, and the expected preferential payments pursuant to the terms of the securities. The Company estimated the fair value of the common stock by using the same probability-weighted scenarios used in estimating the fair value of the warrants. For each potential scenario, the value to the Class B was estimated relative to the existing preferences. The Class B conversion liabilities were settled upon the closing of the Company’s IPO in March 2012.

These estimates include significant judgments about potential future liquidity events and actual results could materially differ and could have a material impact upon the values of the recorded liabilities. Any changes in the estimated fair values of the liabilities in the future will be reflected in the Company’s earnings and such changes could be material.