2. Fair Value Measurements

Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.


•	Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3—Inputs that are unobservable for the asset or liability.

The unobservable inputs in Level 3 can only be used to measure fair value to the extent that observable inputs in Level 1 and Level 2 are not available. The following table represents the Company’s fair value hierarchy as of November 30, 2013, and August 31, 2013, for items that are required to be measured at fair value on a recurring basis:



	November 30, 2013
(in thousands)	Fair Value		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	2,201	$	2,201	$	—	$	—
Investment securities:
Auction rate securities	20,565		—		—		20,565
Short-term bond mutual fund	4,007		4,007		—		—
Restricted cash and investments: ⁽¹⁾
Money market funds	63		63		—		—
Municipal debt securities	33,781		—		33,781		—
Other assets:
Mutual funds ⁽²⁾	20,159		20,159		—		—



	August 31, 2013
(in thousands)	Fair Value		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	26,200	$	26,200	$	—	$	—
Investment securities:
Auction rate securities	22,977		—		—		22,977
Short-term bond mutual fund	4,000		4,000		—		—
Restricted cash and investments: ⁽¹⁾
Money market funds	437		437		—		—
Municipal debt securities	55,055		—		55,055		—
Other assets:
Mutual funds ⁽²⁾	20,043		20,043		—		—

⁽¹⁾

^{As of}^{November 30, 2013}^{, restricted cash and investments of}^{$33.8 million}^{were included in Restricted Cash and Investments in the Consolidated Condensed Balance Sheets. As of}^{August 31, 2013}^{, restricted cash and investments of}^{$35.4 million}^and^{$20.1 million}^{were included in Restricted Cash and Investments and Other Assets, respectively, in the Consolidated Condensed Balance Sheets.}


⁽²⁾	^{Represents assets held pursuant to a deferred compensation plan for certain key management employees.}

On a non-recurring basis, the Company adjusts certain Property and Equipment to fair value through impairment charges. Property and Equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The fair value of the Property and Equipment is determined based on a discounted cash flow analysis using Level 3 inputs. The Company estimates future cash flows based on historical experience and its expectations of future performance. Impairment charges were not material during the first quarter of fiscal 2014 or the first quarter of fiscal 2013.

Level 2 Inputs

All assets classified as Level 2 are valued using matrix pricing. The Company believes that while the assets valued using Level 2 inputs currently trade in active markets and prices could be obtained for identical assets, the classification of these investments as Level 2 is more appropriate when matrix pricing is used.

Auction Rate Securities

The Company's auction rate securities (“ARS”) are tax-exempt bonds that are collateralized by federally guaranteed student loans and are valued using Level 3 inputs. While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates reset periodically in scheduled auctions (generally every 7-35 days). Due to the continued issues in the global credit and capital markets, specifically as it relates to the ARS market, the Company's ARS portfolio experienced sustained failed auctions. A failed auction typically occurs when the number of securities submitted for sale in the auction exceeds the number of purchase bids. As of November 30, 2013, all of the Company’s $23.0 million par value investments were subject to failed auctions. As a result of the failed auctions, the interest rates on the investments reset to the established rates per the applicable investment offering statements. The Company will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, or the underlying securities mature.

The Company does not currently expect to liquidate any ARSs going forward through the normal auction process. However, the Company does expect to be able to liquidate substantially all of its remaining ARS portfolio at par through issuer calls, refinancings or upon maturity. The Company liquidated $2.7 million par value of auction rate securities during the first quarter of fiscal 2014 and none during the first quarter of fiscal 2013. The Company realized a loss of $0.1 million upon the liquidation of auction rate securities during the first quarter of fiscal 2014. As of November 30, 2013, all of the Company's ARS portfolio was classified as long-term assets due to the continued failure of the auction process and the continued uncertainty regarding the timing of future liquidity.

The Company had a temporary gross unrealized loss of $2.4 million ($1.6 million, net of taxes) with respect to its ARS portfolio as of November 30, 2013. Changes in the unrealized loss are included in Accumulated Other Comprehensive Loss within Shareholders’ Equity on the Consolidated Balance Sheets. Because there is not an active market for the Company’s ARS portfolio, the fair value of each security was determined through the use of a discounted cash flow analysis using Level 3 inputs. The two most significant unobservable inputs used in the analysis are the weighted average expected term to liquidate the securities and the illiquidity factor applied to the discount rate. The weighted average expected term assumption used in the analysis is based on the Company's estimate of the timing of future liquidity, which assumes that the securities will be called or refinanced by the issuer or repurchased by the broker dealers prior to maturity. The discount rates used in the analysis are based on market rates for similar liquid tax-exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, a factor was applied to the discount rates to reflect the illiquidity of the investments. These inputs used in the Company’s analysis are sensitive to market conditions and the Company's valuation of its ARS portfolio can change significantly based on the assumptions used. As of November 30, 2013, a 100 basis point increase or decrease in the illiquidity factor along with a 12-month increase or decrease in the weighted average term could result in a gross unrealized loss ranging from $1.4 million to $9.4 million.

The Company also evaluated each of its ARS for other-than-temporary impairment. The Company's evaluation was based on an analysis of the credit rating and parity ratio of each security. The parity ratio is the ratio of trust assets available for distribution to creditors to the trust obligations to those creditors. The credit quality of the Company's ARS portfolio remains high and the securities had a weighted average parity ratio of 125.7% as of November 30, 2013. Based on these factors, the Company concluded there was no other-than-temporary impairment as of November 30, 2013.

The following table summarizes the change in the fair value of the Company’s ARS portfolio measured using Level 3 inputs during the first quarter of fiscal 2014 and the first quarter of fiscal 2013:



(in thousands)	November 30, 2013			November 24, 2012
Beginning Balance	$	22,977		$	23,720
Sales	(2,579		)	—
Realized gains/(losses) on sale of investments	(121		)	—
Net unrealized gains/(losses) included in other comprehensive income	288			(231		)
Transfers out of Level 3	—			(100		)
Ending Balance	$	20,565		$	23,389

Additional Fair Value Disclosures

The estimated fair value of the Company’s long-term debt was $528.5 million as of November 30, 2013, and $546.4 million as of August 31, 2013. The Company has both public notes and private placement notes. The fair value for the public notes is determined using Level 1 inputs as quoted prices in active markets for identical assets or liabilities are available. The fair value of the portion of the debt that are private placement notes is determined through the use of a discounted cash flow analysis using Level 3 inputs as there are no quoted prices in active markets for these notes. The discount rate used in the analysis was based on borrowing rates available to the Company for debt of the same remaining maturities, issued in the same private placement debt market. The fair value of the Company’s long-term debt was greater than the carrying value of the debt by $28.2 million as of November 30, 2013, and $29.9 million as of August 31, 2013.