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Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Measurements  
Fair Value Measurements

Note 3—Fair Value Measurements

 

ASC Topic 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements.  ASC Topic 820 addresses fair value GAAP for financial assets and financial liabilities that are re-measured and reported at fair value at each reporting period and for non-financial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis.

 

In general, fair values determined by Level 1 use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are “unobservable data points” for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

 

The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and certain liabilities that are required to be measured at fair value at December 31, 2012 and 2011:

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Amount
Recorded
on Balance
Sheet

 

Quoted Prices
in Active Markets
for Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets as of December 31, 2012:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

157,551

 

$

157,551

 

—

 

—

 

Short-term investments

 

$

3,441

 

$

3,441

 

—

 

—

 

Liabilities as of December 31, 2012:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

—

 

—

 

—

 

$

23,431

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2011:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

120,306

 

$

120,306

 

—

 

—

 

Short-term investments

 

$

23,000

 

$

23,000

 

—

 

—

 

Liabilities as of December 31, 2011:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

—

 

—

 

—

 

$

12,718

 

 

Short-term investments consist primarily of Certificates of Deposit (“CDs”) purchased through the CDARS (Certificate of Deposit Account Registry Service) process and U.S. Treasury bills with various financial institutions that are backed by the federal government FDIC program.

 

Other financial instruments of the Company consist of accounts receivable, accounts payable and certain accrued liabilities.  These financial instruments generally approximate fair value based on their short-term nature.  The carrying value of the Company’s long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities.

 

The following table provides a rollforward of the Company’s contingent consideration liability level three fair value measurements (see Note 4) during the year ended December 31, 2012:

 

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Contingent Consideration

 

 

 

Balance at December 31, 2011

 

$

12,718

 

Additions:

 

 

 

Sprint acquisition

 

6,200

 

Saxon acquisition

 

1,950

 

Q3C acquisition

 

7,448

 

Change in fair value of contingent consideration

 

2,015

 

Reductions:

 

 

 

Contingent consideration payment to Rockford sellers

 

(6,900

)

Balance at December 31, 2012

 

$

23,431

 

 

The Company assesses the estimated fair value of the contractual obligation to pay the contingent consideration on a quarterly basis and any changes in estimated fair value are recorded as a non-operating charge in the Company’s statement of operations.  Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability (which are greater than 75%) of the acquired company meeting the contractual operating performance target and the estimated discount rate (a rate that approximates the Company’s cost of capital). Significant increases (decreases) in either of those inputs in isolation would result in a significantly higher (lower) fair value measurement.  Generally, a change in the assumption used for the probability of meeting the performance target is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption used for the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.