Note 8 - Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

8. Fair Value Measurements

The Company follows the provisions of ASC 820-10 Fair Value Measurements and Disclosures – Overall, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America, and requires that assets and liabilities carried at fair value be classified and disclosed in one of the three categories noted in the table below. The Company also adopted the provisions of ASC 820-10-35-51 Fair Value Measurement and Disclosure – Overall – Subsequent Measurement – Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, effective April 1, 2009, which provides additional guidance for estimating fair value in accordance with ASC 820-10 Fair Value Measurements and Disclosures – Overall, when the volume and level of activity for the asset or liability have significantly decreased. Effective January 1, 2010, the Company adopted the provisions of ASU 2010-06, “Disclosures About Fair Value Measurements”, which adds new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. For the three and nine months ended September 30, 2011, there were no such transfers.

The following table details the fair value measurements as of September 30, 2011 within the fair value hierarchy of the financial assets that are required to be recorded at fair value (in thousands):

	Fair Value Measurements at September 30, 2011 Using
			Quoted Prices in Active Markets  for Identical Assets		Significant Other Observable Inputs		Significant Unobservable  Inputs
	Total		Level 1		Level 2		Level 3
Money Market Funds	$	49,854	$	49,854	$	-	$	-
US Treasuries and US Government Agency Bonds		64,849		64,849		-		-
Commercial Paper / Corporates		3,009		-		3,009		-
Long-term available-for-sale auction-rate securities		15,720		-		-		15,720
	$	133,432	$	114,703	$	3,009	$	15,720

At September 30, 2011, fixed income available-for-sale securities included $64.8 million in US government agencies and treasuries and $3.0 million in corporate notes and commercial paper, all of which was classified as short-term investments. From these investments, there was $15,600 in unrealized losses. The impact of gross unrealized gains and losses was not material. At September 30, 2011, the Company also had $16.4 million in face value of auction-rate securities, all of which are classified as long-term available-for-sale investments and $49.9 million in money market securities, which are classified as cash and cash equivalents.

During the quarter ended September 30, 2011, Standard and Poor (“S&P”) downgraded the credit rating for U.S. long-term sovereign debt. Management will continue to monitor the situation and potentially rebalance the Company’s investment portfolio, as needed. Currently, the Company does not believe that there is an impairment, temporary or otherwise, related to their investments in U.S. Treasuries and U.S. agencies and as such, the Company has not recorded any such impairment.

The Company adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall – Subsequent Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall – Disclosure, effective April 1, 2009 and used the guidelines therein to determine whether the impairment on its available-for-sale securities is temporary or other-than-temporary. Temporary impairment charges are recorded in accumulated other comprehensive income (loss) within stockholders’ equity and have no impact on net income. Other-than-temporary impairment exists when the entity has the intent to sell the security or it will more likely than not be required to sell the security before anticipated recovery or it does not expect to recover the entire amortized cost basis of the security. Other-than-temporary impairment charges are recorded in other income (expense) in the Consolidated Statement of Operations.

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):

	Auction-Rate Securities
Ending balances at December 31, 2010	$	19,180
Sales and Settlement at Par		(2,050	)
Unrealized Gain		140
Ending balances at March 31, 2011	$	17,270
Sales and Settlement at Par		(50	)
Ending balances at June 30, 2011	$	17,220
Sales and Settlement at Par		(1,650	)
Unrealized Gain		150
Ending balances at September 30, 2011	$	15,720

The Company’s Level 3 assets consist of government-backed student loan auction-rate securities, with interest rates that reset through a Dutch auction every 7 to 35 days and which became illiquid in 2008. At September 30, 2011, the Company’s investment portfolio included $15.7 million, net of impairment charges of $0.7 million, in government-backed student loan auction-rate securities. The underlying maturity of these auction-rate securities is up to 36 years. Although it is unclear as to when these investments will regain their liquidity, management has concluded that $0.6 million and $0.9 million of the gross accumulated impairment charge of $0.7 million and $1.0 million as of September 30, 2011 and December 31, 2010, respectively, was temporary. $0.1 million was previously recorded as other-than-temporary. The cumulative remaining impairment of $0.6 million and $0.9 million was classified as temporary based on the following analysis:

● The decline in the fair value of these securities is not largely attributable to adverse conditions specifically related to these securities or to specific conditions in an industry or in a geographic area;

● Management possesses both the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value;

● Management believes that it is more likely than not that the Company will not have to sell these securities before recovery of its cost basis;

● Except for the credit loss of $70,000 recognized during the year ended December 31, 2009 for the Company’s holdings in auction rate securities described below, the Company does not believe that there is any additional credit loss associated with other auction-rate securities because the Company expects to recover the entire amortized cost basis;

● The majority of the securities remain AAA rated, with $6.4 million of the auction rate securities having been downgraded by Moody’s to A3-Baa3, during the year ended December 31, 2009 and there have been no downgrades since;

● All scheduled interest payments have been made pursuant to the reset terms and conditions; and

● All redemptions of auction-rate securities representing 58% of the original portfolio purchased by the Company in February 2008 have been at par.

Based on the guidance of ASC 320-10-35 and ASC 320-10-50, the Company evaluated the potential credit loss of each of the auction-rate securities that are currently held by the Company. Based on such analysis, the Company determined that those securities that are not 100% Federal Family Education Loan Programs (“FFELPS”) guaranteed are potentially subject to credit risks based on the extent to which the underlying debt is collateralized and the security-specific student-loan default rates. The Company’s portfolio includes two such securities. The senior parity ratio for the two securities is approximately 106%. If, therefore, the student-loan default rate and borrowing rate for these issuers increases, the remaining balance in these trusts may not be sufficient to cover the senior debt. The Company therefore concluded that there is potential credit risk for these two securities and as such, used the discounted cash flow model to determine the amount of credit loss to be recorded. In valuing the potential credit loss, the following parameters were used: 20 year expected term, cash flows based on the 90 day t-bill rates for 20 year forwards and a risk premium of 5.9%, the amount of interest that the Company was receiving on these securities when the market was last active. As of September 30,

2011 and December 31, 2010, the potential credit loss associated with these securities was $70,000, which the Company deemed other-than-temporary and had recorded in other expense in its Condensed Consolidated Statement of Operations during 2009.

Unless a rights offering or other similar offer is made to redeem at par and accepted by the Company, the Company intends to hold the balance of these investments through successful auctions at par, which the Company believes could take approximately 2.0 years.

The valuation of the auction-rate securities is subject to fluctuations in the future, which will depend on many factors, including the collateral quality, potential to be called or restructured, underlying final maturity, insurance guaranty, liquidity and market conditions, among others. To determine the fair value of the auction-rate securities at December 31, 2010, March 31, 2011, June 30, 2011 and September 30, 2011, the Company used a discounted cash flow model, for which there are three valuation parameters, including time-to-liquidity, discount rate and expected return. The following are the values used in the discounted cash flow model:

	December 31, 2010	March 31, 2011	June 30, 2011	September 30, 2011
Time-to-Liquidity	24 months	24 months	24 months	24 months
Expected Return (Based on the 2-year treasury rate, plus a contractual penalty rate)	2.9%	3.3%	2.5%	1.8%
Discount Rate (Based on the 2-year LIBOR, the cost of debt and a liquidity risk premium)	4.1% - 8.9%, depending on the credit-rating of the security	4.5% - 9.3%, depending on the credit-rating of the security	3.8% - 8.6%, depending on the credit-rating of the security	2.9% - 7.7%, depending on the credit-rating of the security

If the auctions continue to fail, the liquidity of the Company’s investment portfolio may be negatively impacted and the value of its investment portfolio could decline.