Note 8 - Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Text Block]

8. Fair Value Measurements

The following is a schedule of Company’s cash and cash equivalents, short-term investments and long-term investments (in thousands):

	Estimated Fair Market Value as of
	March 31, 2013		December 31, 2012
Cash, cash equivalents and investments
Cash in banks	$	73,486	$	59,145
Money market funds		19,801		15,959
Government agencies / treasuries		81,756		85,521
Auction-rate securities backed by student-loan notes		11,715		11,755
Total cash, cash equivalents and investments	$	186,758	$	172,380

Reported as:	March 31, 2013		December 31, 2012
Cash and cash equivalents	$	93,287	$	75,104
Short-term investments		81,756		85,521
Long-term investments		11,715		11,755
Total cash, cash equivalents and investments	$	186,758	$	172,380

The contractual maturities of the Company’s investments classified as available-for-sale is as follows (in thousands):

	March 31, 2013		December 31, 2012
Due in less than 1 year	$	60,794	$	52,880
Due in 1 - 5 years		20,962		32,641
Due in greater than 5 years		11,715		11,755
	$	93,471	$	97,276

ASC 820-10 Fair Value Measurements and Disclosures – Overall defines fair value, establishes a framework for measuring fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as follows:

Level 1: Quoted prices in active markets for identical assets;

Level 2: Significant other observable inputs; and

Level 3: Significant unobservable inputs.

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

	Fair Value Measurements at March 31, 2013
			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	$	19,801	$	19,801	$	-	$	-
US treasuries and US government agency bonds		81,756		-		81,756		-
Long-term available-for-sale auction-rate securities		11,715		-		-		11,715
	$	113,272	$	19,801	$	81,756	$	11,715

	Fair Value Measurements at December 31, 2012
			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	$	15,959	$	15,959	$	-	$	-
US treasuries and US government agency bonds		85,521		-		85,521		-
Long-term available-for-sale auction-rate securities		11,755		-		-		11,755
	$	113,235	$	15,959	$	85,521	$	11,755

The following tables summarize unrealized gains and losses related to our investments in marketable securities designated as available-for sale (in thousands):

	As of March 31, 2013
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Total Fair Value		Fair Value of Investments in Unrealized Loss Position
Money market funds	$	19,801	$	-	$	-		$	19,801	$	-
US treasuries and US government agency bonds		81,724		38		(6	)		81,756		15,363
Auction-rate securities backed by student-loan notes		12,220		-		(505	)		11,715		11,715
	$	113,745	$	38	$	(511	)	$	113,272	$	27,078

	As of December 31, 2012
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Total Fair Value		Fair Value of Investments in Unrealized Loss Position
Money market funds	$	15,959	$	-	$	-		$	15,959	$	-
US treasuries and US government agency bonds		85,483		45		(7	)		85,521		14,121
Auction-rate securities backed by student-loan notes		12,245		-		(490	)		11,755		11,755
	$	113,687	$	45	$	(497	)	$	113,235	$	25,876

At March 31, 2013, fixed income available-for-sale securities included $81.8 million securities issued by government agencies and treasuries which are classified as short-term investments on the Condensed Consolidated Balance Sheet. The Company also had $19.8 million invested in money market funds. At March 31, 2013, there was $6,000 in unrealized losses from these investments. The impact of gross unrealized gains and losses was not material.  At March 31, 2013, the Company also had $11.7 million of auction-rate securities, all of which are classified as long-term available-for-sale investments.

At December 31, 2012, fixed income available-for-sale securities included $85.5 million securities issued by government agencies and treasuries which are classified as short-term investments on the Condensed Consolidated Balance Sheet. The Company also had $16.0 million invested in money market funds. At December 31, 2012, there was $7,000 in unrealized losses from these investments. The impact of gross unrealized gains and losses was not material.  At December 31, 2012, the Company also had $11.8 million of auction-rate securities, all of which are classified as long-term available-for-sale investments.

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 Company either has the intent to sell the security, 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 interest income and other, net in the Condensed Consolidated Statement of Operations.

The Company's level 2 assets consist of U.S. treasuries and U.S. government agency bonds. These securities generally have market prices available from multiple sources, which are used as inputs into a distribution-curve based algorithm to determine fair value.

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. The following table provides a reconciliation of the Company’s level 3 assets (in thousands):

	Auction-Rate Securities
Beginning balances at January 1, 2013	$	11,755
Sales and settlement at par		(25	)
Total realized and unrealized gains (losses):
Included in interest income and other, net		-
Included in other comprehensive income		(15	)
Ending balance at March 31, 2013	$	11,715

The Company’s investment portfolio as of March 31, 2013 included $11.7 million in government-backed student loan auction-rate securities, net of impairment charges of $535,000, of which $505,000 was temporary and $30,000 was recorded as other-than-temporary. This compares to an investment balance for auction-rate securities as of December 31, 2012 of $11.8 million in government-backed student loan auction-rate securities, net of impairment charges of $520,000, of which $490,000 was temporary and $30,000 was recorded as other-than-temporary.

The underlying maturities of these auction-rate securities are up to 35 years. As of March 31, 2013 and December 31, 2012, the portion of the impairment classified as temporary was based on the following analysis:

1. 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;

2. 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;

3. 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;

4. Except for the credit loss of $70,000 recognized in 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;

5. $6.3 million of auction-rate securities were downgraded by Moody’s to A3-Baa3 during the year ended December 31, 2009;

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

7. All redemptions of auction-rate securities representing 72% of the original portfolio 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% 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 increases for these issuers, 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: 2.0 year expected term, cash flows based on the 90-day t-bill rates for 2.0 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. During the year ended December 31, 2012, the Company was able to redeem a security at face value for which an other-than-temporary impairment of $40,000 had previously been recorded for and therefore, recognized a gain of $40,000 in interest income and other, net, in our Condensed Consolidated Statement of Operations.

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.

Determining the fair value of the auction-rate securities requires significant management judgment regarding projected future cash flows which will depend on many factors, including the quality of the underlying collateral, estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others. To determine the fair value of the auction-rate securities, the Company used a discounted cash flow model, for which there are four unobservable inputs: estimated time-to-liquidity, discount rate, credit quality of the issuer and expected interest receipts. A significant increase in the time-to liquidity or the discount rate inputs or a significant decrease in the credit quality of the issuer or the expected interest receipts inputs in isolation would result in a significantly lower fair value measurement.

The following are the values used in the discounted cash flow model:

	March 31, 2013			December 31, 2012
Time-to-liquidity (months)	24			24
Expected return (based on the requisite treasury rate, plus a contractual penalty rate)	1.7%			1.8%
Discount rate (based on the requisite LIBOR, the cost of debt and a liquidity risk premium)	2.5%	-	7.3%, depending on the credit-rating of the security	2.5%	-	7.3% 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.