0001120914 2011-09-30 0001120914 2010-12-31 0001120914 2011-07-01 2011-09-30 0001120914 2010-07-01 2010-09-30 0001120914 2011-01-01 2011-09-30 0001120914 2010-01-01 2010-09-30 0001120914 2009-12-31 0001120914 2010-09-30 0001120914 2011-11-02 iso4217:USD iso4217:USD xbrli:shares xbrli:shares 44187000 38154000 21588000 23442000 254000 254000 3587000 3185000 69362000 64781000 798000 797000 784000 718000 747000 1369000 615000 727000 72306000 68392000 923000 1080000 4181000 3964000 3295000 2636000 2636000 3021000 2590000 1802000 28000 108000 13653000 12611000 3504000 3690000 822000 1259000 17979000 17560000 0 0 0.00015 0.00015 5000000 5000000 0 0 0 0 4000 4000 0.00015 0.00015 70000000 70000000 32499000 31276000 28260000 27603000 207581000 200866000 22344000 19298000 4239000 3673000 -130902000 -130669000 -12000 -71000 54327000 50832000 72306000 68392000 13903000 10498000 37473000 31729000 3036000 4330000 11643000 13703000 16939000 14828000 49116000 45432000 7650000 6427000 21350000 19894000 156000 360000 468000 1079000 7806000 6787000 21818000 20973000 9133000 8041000 27298000 24459000 3366000 3699000 10912000 10958000 4158000 3389000 14239000 12521000 51000 70000 153000 238000 4000 303000 -129000 271000 7579000 7461000 25175000 23988000 1554000 580000 2123000 471000 201000 -636000 -209000 30000 1755000 -56000 1914000 501000 1129000 28000 2147000 804000 626000 -84000 -233000 -303000 0.02 0.00 -0.01 -0.01 0.02 0.00 -0.01 -0.01 28124000 27413000 28015000 27154000 28348000 27413000 28015000 27154000 355000 695000 3787000 4191000 621000 1317000 -87000 -517000 -536000 -537000 1854000 -3181000 -219000 -63000 -131000 -439000 182000 -782000 2000 -1693000 -357000 1592000 788000 -1128000 6026000 -848000 353000 121000 -353000 -121000 2063000 50000 865000 783000 2510000 84000 87000 334000 746000 26000 -111000 6033000 -334000 34899000 34565000 1695000 1657000 4000 7000 PDF SOLUTIONS INC 10-Q --12-31 28269715 false 0001120914 Yes No Accelerated Filer No 2011 Q3 2011-09-30 <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">1. BASIS OF PRESENTATION</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="FONT-STYLE: italic; DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Basis of Presentation</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (&#8220;the Company&#8221;) pursuant to the rules and regulations of the Securities and Exchange Commission (&#8220;SEC&#8221;), including the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary, to present a fair statement of results for the interim periods presented. Such adjustments consist of normal recurring adjustments and, as explained in Note 2, adjustments reflected in revised prior period condensed consolidated financial statements. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company&#8217;s Annual Report on Form 10-K for the year ended December 31, 2010.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of all significant intercompany balances and transactions.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Significant Estimates</font> &#160;&#8212; The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (&#8220;U.S. GAAP&#8221;) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. A significant portion of the Company&#8217;s revenues require estimates with respect to total costs which may be incurred and revenues earned. Actual results could differ from these estimates.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Revenue Recognition</font> &#160;&#8212; The Company derives revenue from two sources: Design-to-silicon-yield solutions and Gainshare performance incentives.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Design-to-Silicon-Yield Solutions</font> &#8212; Revenues that are derived from Design-to-silicon-yield solutions come from services and software licenses. The Company recognizes revenue for each element of Design-to-silicon-yield solutions as follows:</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Services</font> &#8212; The Company generates a significant portion of its Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenues under contracts for solution implementation services are recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting. Losses on solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On occasion, the Company licenses its software products that are not essential to the&#160;provision of these services as a component of its fixed-price service contract. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided over the license term.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In October 2009, the Financial Accounting Standards Board&#160;(&#8220;FASB&#8221;) amended the accounting standards for multiple-deliverable revenue arrangements to:</font> </div><br/><table cellpadding="0" cellspacing="0" width="100%" style="FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-SIZE: 10pt; FONT-FAMILY: times new roman"> <tr> <td valign="top" width="5%" style="PADDING-LEFT: 0pt; MARGIN-LEFT: 446pt"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">&#160;</font> </td> <td valign="top" width="4%"> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><font style="DISPLAY: inline; FONT-FAMILY: times new roman">&#9679;</font></font> </div> </td> <td valign="top" width="81%"> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;</font> </div> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> &#160; </div> </td> </tr> <tr> <td valign="top" width="5%"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">&#160;</font> </td> <td valign="top" width="4%"> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><font style="DISPLAY: inline; FONT-FAMILY: times new roman">&#9679;</font></font> </div> </td> <td valign="top" width="81%"> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">require an entity to allocate revenue in an arrangement using best estimate of selling prices (&#8220;BESP&#8221;) of deliverables if a vendor does not have vendor-specific objective evidence of fair value (&#8220;VSOE&#8221;) or third-party evidence of selling price (&#8220;TPE&#8221;); and</font> </div> </td> </tr> </table><br/><table cellpadding="0" cellspacing="0" width="100%" style="FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-SIZE: 10pt; FONT-FAMILY: times new roman"> <tr> <td valign="top" width="5%"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">&#160;</font> </td> <td valign="top" width="4%"> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><font style="DISPLAY: inline; FONT-FAMILY: times new roman">&#9679;</font></font> </div> </td> <td valign="top" width="81%"> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.</font> </div> </td> </tr> </table><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company elected to early adopt this accounting standard on April 1, 2010 on a prospective basis for applicable transactions originating or materially modified after January 1, 2010. The Company&#8217;s adoption of this guidance does not generally change the accounting for the Company&#8217;s software transactions. It only affects certain revenue arrangements that include both solution implementation services and software products that are not essential to the provision of these services. The amount of product and service revenue recognized in a given period is affected by the Company&#8217;s judgment as to whether an arrangement includes multiple deliverables and, if so, its determination of the fair value of each deliverable. In general, VSOE does not exist for the Company&#8217;s solution implementation services and software products. Because its services and products include its unique technology, the Company is not able to determine TPE. Therefore, the Company uses BESP in its allocation of arrangement consideration. In determining BESP, the Company applies significant judgment as it weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at a&#160;&#160;BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its fair value. Fees allocated to solution implementation services are recognized using the cost-to-cost percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance. Prior to the adoption of this new accounting standard, under these arrangements, where VSOE of fair value existed for the support and maintenance element, the support and maintenance revenue was recognized separately over the term of the supporting period and the remaining fee was recognized as services were performed using the cost-to-cost percentage of completion method of contract accounting.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Software Licenses</font> &#160;&#8212; The Company also licenses its software products separately from its integrated solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized under the residual method when (1)&#160;persuasive evidence of an arrangement exists, (2)&#160;delivery has occurred, (3)&#160;the fee is fixed or determinable, (4)&#160;collectability is probable, and (5) the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for its fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by the Company&#8217;s VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company&#8217;s customary pricing for such services when sold separately. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting, and such revenue is recorded as services revenue.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Gainshare Performance Incentives</font> &#160;&#8212; When the Company enters into a contract to provide yield improvement services, the contract usually includes two components: (1) a fixed fee for performance by the Company of services delivered over a specific period of time; and (2) a gainshare performance incentives component where the customer may pay a variable fee, usually after the fixed fee period has ended. Revenue derived from gainshare performance incentives represents profit sharing and performance incentives earned based upon the Company&#8217;s customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have little to&#160;no cost to the Company. Due to the uncertainties surrounding attainment of such operational levels, the Company recognizes gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection.</font> </div><br/> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">2. REVISIONS TO FINANCIAL STATEMENTS</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font id="TAB2-2" style="LETTER-SPACING: 9pt">&#160;&#160;&#160;</font>&#160;&#160;&#160; As previously disclosed in the Company&#8217;s quarterly report on Form 10-Q for the period ended June 30, 2011, the Company identified errors that affected prior periods, primarily relating to its accounting for stock compensation under its employee stock purchase plan during the quarter ended June 30, 2011. The Company assessed the impact of those errors, including the impact of previously disclosed out-of-period adjustments, on its prior period financial statements and concluded that those errors were not material, individually or in the aggregate, to any of those financial statements. Although the effect of those errors was not material to any previously issued financial statements, the cumulative effect of correcting the identified errors&#160;identified in the quarter ended June 30, 2011&#160;in the current year would have been material for the fiscal year 2011 financial statements. Consequently, the Company concluded that it needed to revise its prior period financial statements, the next time those financial statements are reissued. As part of that revision, the Company also&#160;concluded it would reverse&#160;other previously disclosed out-of period adjustments, which were immaterial, and record them instead in the periods in which the errors originated. The Company also decided to correct the classification of certain amounts in the prior year related to cost of design-to-silicon-yield solutions, research and development and selling, general and administrative and correct the classification of the short-term portion of deferred rent balance that was previously recorded in other non-current liabilities, none of which&#160;affected reported net income (loss) for any periods previously reported.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">During the three months ended September 30, 2011, the Company identified additional errors relating to over-recognition of research and development tax credits to its French subsidiary, which affected the Company's&#160;income tax provision for fiscal year&#160;2009 and for the first and second quarters of 2011. The Company also identified an error related to&#160;over-recognition of&#160;research and development grants, which affected the first and second quarters of 2011.&#160;&#160;The Company has concluded that these errors, combined with the errors previously identified and disclosed in its Form 10-Q for the second quarter of 2011, are immaterial to any prior period financial statements. The Company concluded that it will further revise its prior year and interim financial statements to also correct the errors identified in the period ended&#160;September 30,&#160;2011 that related to prior periods.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The financial statements as of September 30, 2010, and for the three and nine-month periods then ended included herein have been prepared in light of the revisions above. The financial statements as of June 30, 2010 and for the three and six-month periods then ended were previously revised in the Company&#8217;s quarterly report on Form 10-Q for the period ended June 30, 2011 and are not impacted by the additional errors identified in the period ended September 30, 2011. The financial statements for all other periods affected by the revisions can continue to be relied upon, and will be revised to reflect the revisions discussed above, the next time such financial statements are included in future reports for comparative purposes.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">These revisions have no net impact on the Company&#8217;s net cash amounts provided by (used in) operating, financing or investing activities for the any of the periods previously reported.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The following tables show the financial statement effect of the revisions for all periods affected:</font> </div><br/><table cellpadding="0" cellspacing="0" width="100%" style="FONT-FAMILY: times new roman; 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This amendment is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2010.&#160;&#160;The guidance is effective for the Company&#8217;s interim period ended March 31, 2011. The adoption of this guidance did not have a material impact on the Company&#8217;s financial statements.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In January 2010, the FASB amended its guidance on fair value measurements. This guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. This guidance also requires disclosure of activity in Level 3 fair value measurements. 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TEXT-INDENT: 0pt; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">&#160;</font> </td> <td valign="top" width="12%" style="TEXT-ALIGN: center; TEXT-INDENT: 0pt; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <div style="TEXT-ALIGN: center; LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">*%</font> </div> </td> <td valign="top" width="1%" style="TEXT-ALIGN: center; TEXT-INDENT: 0pt; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">&#160;</font> </td> <td valign="top" width="12%" style="TEXT-ALIGN: center; TEXT-INDENT: 0pt; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <div style="TEXT-ALIGN: center; LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">11%</font> </div> </td> </tr> </table><br/><div style="LINE-HEIGHT: 1.25; 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All ARS are backed by pools of student loans guaranteed by governmental agencies and private entities, and were rated AAA/Aaa at the date of acquisition. The liquidity and fair value of these securities has been reduced by the uncertainty in the credit markets and the exposure of these securities to the financial condition of bond insurance companies, as evidenced by the rating downgrade of MBIA (bond insurer on one of the Company&#8217;s ARS) from Aaa to A2, by Moody&#8217;s Investor Services on June 19, 2008. All ARS have failed to sell at auction since February 2008, and as a result, their interest rates were reset to the maximum LIBOR + 150 basis points. The only activity associated with these instruments since February 2008 was the repurchase of $500,000 of ARS at par by issuers. As a result of these auction failures, there was limited active market with observable prices for these securities. Therefore, the Company computed the fair value of these securities based on a discounted cash flow model, using significant level 3 inputs, to take into account the lack of liquidity. The Company does not believe that the student loans backing these securities, the principal of these assets, is at risk. Furthermore, the Company intends to hold these securities until the credit markets recover and these securities resume pricing at or near par and it is not more likely than not that the Company will be required to sell the securities before recovery of the principal. As a result, the Company recorded a temporary impairment to other comprehensive income and classified these securities as non-current investments. The cumulative impairment for these securities as of September 30, 2011 and December 31, 2010 was $216,000 and $282,000, which is included in other comprehensive income.&#160;&#160;During the three-month period ended September 30, 2011, the Company recorded an unrealized gain of $66,000 related to the increase in fair value of the Company&#8217;s auction rate securities as a component of accumulated other comprehensive income (loss). The valuation may be revised in future periods as market conditions evolve.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3) (in thousands):</font> </div><br/><table cellpadding="0" cellspacing="0" width="100%" style="FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-SIZE: 10pt; FONT-FAMILY: times new roman"> <tr> <td valign="bottom" style="PADDING-BOTTOM: 2px"> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold; TEXT-DECORATION: underline"><font style="DISPLAY: inline">Auction-Rate Securities</font></font> </div> </td> <td valign="bottom" style="PADDING-BOTTOM: 2px"> <font style="DISPLAY: inline; 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TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 5.05pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">Ending balance at September 30, 2011<font id="TAB1-1072" style="MARGIN-LEFT: 12pt"></font></font> </div> </td> <td valign="bottom" width="1%" style="PADDING-BOTTOM: 4px"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">&#160;</font> </td> <td valign="bottom" width="1%" style="BORDER-BOTTOM: black 4px double; TEXT-ALIGN: left"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">$</font> </td> <td valign="bottom" width="12%" style="BORDER-BOTTOM: black 4px double; TEXT-ALIGN: right"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt"><font style="DISPLAY: inline">784</font></font> </td> <td nowrap="nowrap" valign="bottom" width="1%" style="TEXT-ALIGN: left; PADDING-BOTTOM: 4px"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt">&#160;</font> </td> </tr> </table><br/> <div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="FONT-WEIGHT: bold">14. COMMITMENTS AND CONTINGENCIES</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: normal">From time to time, we are subject to various claims and legal proceedings that arise in the ordinary course of business. Although we currently believe that the ultimate outcome of any of these claims and proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainty. If an unfavorable ruling occurs in any of the legal proceedings described below, our financial position and results of operations and cash flows could be negatively affected. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB&#160;requirements. With respect to each of the matters below, we have determined a potential loss is not probable at this time and, accordingly, no amount has been accrued at September 30, 2011.&#160;&#160;As we continue to monitor these matters, however, our determination could change and we may decide a different reserve is appropriate in the future.</font></font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: normal">Philip Steven Melman filed a complaint against us and our Chief Executive Officer on December 7, 2009 in the Superior Court for Santa Clara County.&#160; In the complaint, Mr. Melman alleges wrongful discharge based on discrimination, fraud, breach of contract and similar theories, in connection with the termination of Mr. Melman's employment&#160;with us.&#160; The complaint seeks compensatory and punitive damages, any other available remedies, as well as attorney's fees and costs.&#160; On August 15, 2011, the court issued a definitive ruling granting the Company&#8217;s motion for summary judgment, which&#160;final order for this ruling was entered by the court on November 9, 2011.</font></font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 18pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: times new roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-WEIGHT: normal">Global Software Services, Inc., a Palestinian corporation (&#8220;GSSI&#8221;), filed a complaint against us on February 16, 2010 in the Superior Court for Santa Clara County.&#160; In the complaint, GSSI alleged that we failed to pay GSSI amounts owed under a Professional Services Agreement pursuant to which GSSI was providing software-related development and support services to us.&#160; In addition, GSSI alleged that we interfered with GSSI&#8217;s business relationships and employee relationships, and engaged in unfair business practices in violation of Business &amp; Professions Code Section 17200.&#160; The complaint sought compensatory and punitive damages, disgorgement and restitution, injunctive relief and any other available equitable remedies, as well as attorney's fees and costs.&#160; On December&#160;2,&#160;2010, the court dismissed GSSI's action with prejudice.&#160;&#160;On April 14, 2011, Global Software Systems, LLC ("GSS LLC") filed a Notice of Motion to Intervene in the same matter.&#160;&#160;On May 4, 2011, Andre Hawit, chief executive officer of GSSI and president of GSS LLC, filed a complaint (as a cross-cross complainant) against both the Company and our Chief Executive Officer in the same matter before the Superior Court for Santa Clara County.&#160;&#160;Both Mr. Hawit and GSS LLC are continuing to pursue claims arising in connection with the subject matter of the lawsuit originally filed by GSSI.&#160;&#160;Specifically, Mr. Hawit's cross-cross complaint alleges that we interfered with his economic relationship with GSSI and that we engaged in unfair business practices in violation of Business and Professions Code Section 17200.&#160;&#160;He is seeking compensatory damages, punitive damages, restitution and attorney fees and costs.&#160;&#160;GSS LLC is alleging that it was an assignee of the rights of GSSI and that the court should grant it relief from the default judgment entered against GSSI and permit it to pursue those claims as an assignee.&#160;&#160;In August 2011, the court denied all previously filed motions to set aside the dismissal and for GSS LLC to intervene in the action.&#160; On September 2, 2011, GSS LLC filed a notice of</font> <font style="FONT-WEIGHT: normal">appeal of the dismissal of the action, the denial of its motions to intervene and several other related rulings.&#160;&#160;We believe the cross-cross-complaint and the appeal are without merit and intend to vigorously oppose them.</font></font></font> </div><br/>