Fair Value Measurements

9 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

Note 4. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis include the following at June 30, 2011 and September 30, 2010 (in thousands):

	Fair Value
	Measurements Using
	Level 1		Level 2		Level 3		Total
June 30, 2011 (unaudited)
Derivative liability – compound embedded derivative - 2014 Debenture	$	—	$	—	$	12,985	$	12,985
September 30, 2010
Derivative liability – compound embedded derivative - 2014 Debenture	$	—	$	—	$	15,476	$	15,476

The following table provides a reconciliation of the beginning and ending balances for the derivative liability-embedded derivative measured at fair value using significant unobservable inputs (Level 3) (in thousands):

	Compound Embedded Derivative related to 2014 Debentures
Balance at September 30, 2010	$	15,476
Transfers in and /or out of Level 3	—
Purchases, sales, issuances, and settlements	—
Total net gains included in earnings	(2,491		)
Balance at June 30, 2011 (unaudited)	$	12,985

The embedded derivative liability, which is included in long term liabilities, represents the value of the equity conversion feature and a “make-whole” feature of the 2014 Debentures. The make-whole feature, requiring the Company to redeem foregone interest upon conversion by the holder, which for accounting purposes results in the exercise price not being indexed to the Company’s own stock, which in turn results in the presentation of the embedded derivative as a standalone liability at fair value.

There is no current observable market for this type of derivative and, as such, the Company determined the value of the embedded derivative using a lattice-based convertible bond valuation model that combined expected cash outflows with market-based assumptions. The fair value of the 2014 Debentures (convertible subordinated debt) without the embedded derivative feature was also estimated using a convertible bond valuation model within a lattice framework. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent price quotes and trading information regarding shares of the Company’s common stock into which the 2014 Debentures are convertible. As the conversion price is not being indexed to the Company’s own stock, the embedded derivative is bifurcated and presented on the balance sheet at fair value and the embedded derivative will be marked to market.  The change in the fair value of the bifurcated embedded derivative is primarily related to the change in price of the underlying common stock.

The valuation methodologies used by the Company as described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.