Fair Value of Financial Instruments and Investments

6 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments and Investments

Note 3—Fair Value of Financial Instruments and Investments

The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets recorded at fair value on the Company’s consolidated balance sheets are categorized as follows:

Level 1: Unadjusted quoted prices for identical assets in an active market.

Level 2: Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full-term of the asset. Level 2 inputs include the following:

• quoted prices for similar assets in active markets,

• quoted prices for identical or similar assets in non-active markets,

• inputs other than quoted market prices that are observable, and

• inputs that are derived principally from or corroborated by observable market data through correlation or other means.

Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.

There were no transfers between levels in the fair value hierarchy during any period presented herein. The following table presents the Company’s cash and cash equivalents, investments, embedded derivatives and warrant liability including the hierarchy for its financial instruments measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011:

June 30, 2012	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash and cash equivalents:
Cash	$	21,553	$	21,553	$	21,553	$	—	$	—
Money market funds		70,910		70,910		70,910		—		—
Total cash and cash equivalents		92,463		92,463		92,463		—		—
Short-term investments:
Certificates of deposit		49,748		49,748		49,748		—		—
Total short-term investments		142,211		142,211		142,211		—		—
Restricted cash:
Certificates of deposit		2,930		2,930		2,930		—		—
Total restricted cash		2,930		2,930		2,930		—		—
	$	145,141	$	145,141	$	145,141	$	—	$	—
Liabilities:
Embedded derivatives:
Debt redemption features	$	948	$	948	$	—	$	—	$	948
Total embedded derivatives		948		948		—		—		948
Warrant liability		1,490		1,490		—		—		1,490
Total	$	2,438	$	2,438	$	—	$	—	$	2,438
December 31, 2011	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash and cash equivalents:
Cash	$	8,680	$	8,680	$	8,680	$	—	$	—
Money market funds		105,414		105,414		105,414		—		—
Total cash and cash equivalents		114,094		114,094		114,094		—		—
Short-term investments:
Certificates of deposit		55,694		55,694		55,694		—		—
Total short-term investments		55,694		55,694		55,694		—		—
Restricted cash:
Certificates of deposit		2,580		2,580		2,580		—		—
Total restricted cash		2,580		2,580		2,580		—		—
Total	$	172,368	$	172,368	$	172,368	$	—	$	—

Level 3 Valuation

Financial assets or liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The following table provides a summary of the changes in fair value of the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six-month period ended June 30, 2012:

	Warrant Liability			Debt Redemption Features
Level 3
Balance at December 31, 2011	$	—		$	—
Valuation on May 9, 2012 (date of debt exchange transaction, see Note 7)		5,282			948
Unrealized gain		(3,792	)		—
Balance at June 30, 2012	$	1,490		$	948

The Company determines the fair value of its warrant liability based on the Black-Sholes pricing model. Historical information is the primary basis for the selection of the expected volatility. The risk-free interest rate is selected based upon yields of United States Treasury issues with a term equal to the expected term of the warrants. The expected term is derived from the remaining contractual term of the warrant. The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within other expense or income, net on the Company’s consolidated statement of operations.

In accordance with FASB ASC 815, Derivatives and Hedging, the Company has separately accounted for certain contingent debt features of its senior secured notes due 2019, (‘the 2019 Notes’), as described more fully in Note 7, as embedded derivative instruments, which are measured at fair value. Changes in the fair value of these embedded derivatives are recognized in earnings. Key inputs into the valuation model are interest rate volatility, risk-free interest rates, bond yields, credit spreads and certain probabilities determined by management.

Disclosure of Fair Value of Financial Instruments

The Company’s financial instruments mainly consist of cash and cash equivalents, accounts receivable, accounts payable, other current liabilities and debt obligations. The carrying amounts of the Company’s cash equivalents, accounts receivable, current liabilities and accounts payable approximate their fair value due to the short-term nature of these instruments.

At June 30, 2012, $122.4 million in principal amount of the 2018 Convertible Notes remained outstanding, which had a carrying value of $95.2 million and a fair value $30.3 million. At December 31, 2011, $230.0 million principal amount of the 2018 Convertible Notes was outstanding, which had a carrying value of $175.5 million and a fair value of $116.4 million. The fair value of the 2018 Convertible Notes at June 30, 2012 and December 31, 2011 was based upon the quoted market prices (Level 1) at June 27, 2012 and December 30, 2011, respectively, which was the last trading day of the each respective period ended.

At June 30, 2012, $170.9 million in principal amount of the 2019 Notes was outstanding, which had a carrying value of $119.8 million and a fair value of $118.2 million.

See Note 7 to the Company’s Consolidated Financial Statements for further discussion of the 2018 Convertible Notes and the 2019 Notes and the exchange agreement.