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Long-Term Investments
 9 Months Ended
Sep. 30, 2012
Long-Term Investments [Abstract]  
Long-Term Investments

2. Long-Term Investments

The Company’s principal sources of liquidity are its existing balances of cash and cash equivalents, as well as cash generated from operations. Consistent with the Company’s investment policy guidelines, the Company can invest, and has historically invested, its cash balances in demand deposit accounts, money market funds, brokered certificates of deposit, and auction rate securities meeting certain quality criteria. All of the Company’s investments are subject to credit, liquidity, market, and interest rate risk.

The Company’s long-term investments are classified as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, attributable to credit loss recorded through the statement of operations and unrealized gains and losses, net of tax, attributable to other non-credit factors recorded in “Accumulated other comprehensive income (loss)”, a component of Stockholders’ Equity. In determining the amount of credit loss, the Company compares the present value of cash flows expected to be collected to the amortized cost basis of the securities, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, the net amount of which, along with interest and realized gains and losses, is included in “Other income (expense), net” in the Condensed Consolidated Statements of Operations. The Company periodically evaluates investments to determine if impairment is required, whether an impairment is other than temporary, and the measurement of an impairment loss. The Company considers a variety of impairment indicators such as, but not limited to, a significant deterioration in the earnings performance, credit rating, or asset quality of the investment.

As of September 30, 2012, the Company held par value of $6,100,000 of auction rate securities. These auction rate securities consist of collateralized debt obligations, supported by pools of student loans, sponsored by state student loan agencies and corporate student loan servicing firms. The interest rates for these securities are reset at auction at regular intervals ranging from seven to 28 days. The auction rate securities held by the Company traded at par prior to February 2008 and are callable at par at the option of the issuer.

Until February 2008, the auction rate securities market was liquid, as the investment banks conducting the periodic “Dutch auctions” by which interest rates for the securities had been established had committed their capital to support such auctions in the event of insufficient third-party investor demand. Starting the week of February 11, 2008, a substantial number of auctions failed, as demand from third-party investors weakened and the investment banks conducting the auctions chose not to commit capital to support such auctions (i.e., investment banks chose not to purchase securities themselves in order to balance supply and demand, thereby facilitating a successful auction, as they had done in the past). The consequences of a failed auction are (a) an investor must hold the specific security until the next scheduled auction (unless that investor chooses to sell the security to a third party outside of the auction process) and (b) the interest rate on the security generally resets to an interest rate set forth in each security’s indenture.

 

As of September 30, 2012, the Company held auction rate securities that had experienced failed auctions totaling $6,100,000 at par value, all of which had been purchased through and are held by a broker-dealer affiliate of Bank of America, N.A. (the “Failed Auction Securities”). The Failed Auction Securities held by the Company were AAA/Aaa/A3 rated by the major credit rating agencies, with all of the securities collateralized by student loans, of which most are guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe any of the issuers of the Failed Auction Securities held by the Company are presently at risk of default. Through September 30, 2012, the Company has continued to receive interest payments on the Failed Auction Securities in accordance with the terms of their respective indentures. Management believes the Company ultimately should be able to liquidate all of its Failed Auction Securities without significant loss primarily due to the overall quality of the issues held and the collateral securing the substantial majority of the underlying obligations. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Securities exceeds 12 months. As a result, the Company continued to classify the Failed Auction Securities as long-term as of September 30, 2012.

The following is a summary of available-for-sale securities (in thousands):

 

                                 

September 30, 2012

   Cost     Gross
Unrealized
Gains		     Gross
Unrealized
Losses		     Estimated
Fair
Value		  

Failed Auction Securities

   $ 6,100     $ 0     $ 1,051     $ 5,049  

Brokered certificates of deposit

     1,370       11       0       1,381  

Certificates of deposit

     465       0       0       465  
   

 

 

    

 

 

    

 

 

    

 

 

  
    $ 7,935     $ 11     $ 1,051     $ 6,895  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

                                 

December 31, 2011

   Cost     Gross
Unrealized
Gains		     Gross
Unrealized
Losses		     Estimated
Fair
Value		  

Failed Auction Securities

   $ 9,100     $ 0     $ 1,628     $ 7,472  

Brokered certificates of deposits

     1,640       8       0       1,648  

Certificates of deposit

     465       0       0       465  
   

 

 

    

 

 

    

 

 

    

 

 

  
    $ 11,205     $ 8     $ 1,628     $ 9,585  
   

 

 

    

 

 

    

 

 

    

 

 

  

All of the Failed Auction Securities as of September 30, 2012, have been in an unrealized loss position for greater than 12 months.

 

The amortized cost and estimated fair value of available-for-sale securities on September 30, 2012, by contractual maturities, are shown below (in thousands):

 

                 
     Cost     Estimated
Fair Value		  

Due in one year or less

   $ 593     $ 596  

Due in two to ten years

     1,242       1,250  

Due in ten to twenty years

     0       0  

Due in twenty to forty years

     6,100       5,049  
   

 

 

    

 

 

  
    $ 7,935     $ 6,895  
   

 

 

    

 

 

  

Based on the fair value measurements described in Note 3, the fair value of the Failed Auction Securities on September 30, 2012, with a par value of $6,100,000, was estimated by the Company to be approximately $5,049,000, an increase in fair value of $577,000, net of $3,000,000 of redemptions from December 31, 2011. The gross unrealized loss of $1,051,000 on the Failed Auction Securities consists of two types of estimated loss: an aggregate credit loss of $292,000 and an aggregate temporary impairment of $759,000. For the nine months ended September 30, 2012, the aggregate credit loss on the Failed Auction Securities decreased by a net amount of $16,000, which was recorded in “Net credit gains (losses) recognized in earnings” in the Condensed Consolidated Statement of Operations. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the securities, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (See Note 3).

The following table represents a roll forward of the activity related to the credit loss recognized in earnings on available-for-sale auction rate securities held by the Company for the nine months ended September 30 (in thousands):

 

                 
    2012     2011  

Balance at the beginning of the period

   $ 308     $ 610  

Reductions for securities sold during the period

     (16 )      (366 ) 

Additions for the amount related to credit (gain) loss for which other-than- temporary impairment was not previously recognized

     0       71  
   

 

 

    

 

 

  

Balance at the end of the period

   $ 292     $ 315  
   

 

 

    

 

 

  

In the third quarter of 2012, the Company decreased the temporary impairment recorded in “Accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheet by $339,000 to reflect an increase in the estimated fair value of the Failed Auction Securities.

At this time, the Company has no intent to sell any of the impaired Failed Auction Securities and does not believe it is more likely than not the Company will be required to sell any of these securities. Management expects the securities to regain liquidity as the financial markets recover from the current economic downturn. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security deteriorates, or the anticipated recovery in the market values does not occur, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the Condensed Consolidated Statement of Operations, and any such impairment adjustments may be material.

Based on the Company’s ability to access cash and cash equivalents and its expected operating cash flows, management does not anticipate the current lack of liquidity associated with the Failed Auction Securities held will affect the Company’s ability to execute its current operating plan.