Note 6: Investments and Fair Value Measurements

We invest our excess cash in deposits with major banks in money market securities and municipal, U.S. government and sponsored entity, and corporate debt securities. By policy, we invest primarily in high-grade marketable securities. We are exposed to credit risk in the event of default by the financial institutions or issuers of these investments to the extent of amounts recorded on the Consolidated Balance Sheet.

We consider all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Typically, the cost of these investments has approximated fair value. Marketable investments with a maturity greater than three months are classified as available-for-sale short-term investments. Available-for-sale securities are stated at fair market value with unrealized gains and losses reported as a separate component of OCI, adjusted for deferred income taxes. The credit portion of any other-than-temporary impairment is included in net income (loss). Realized gains and losses on sales of financial instruments are recognized upon sale of the investments using the specific identification method.

Our available-for-sale securities as of December 31, 2011 and 2010 are as follows (in thousands):


	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
December 31, 2011
U.S. Government securities and sponsored entities	$	21,366	$	85	$	(10	)	$	21,441
Foreign Government securities		3,782		—		(4	)		3,778
Corporate debt securities		62,218		182		(117	)		62,283
Mortgage-backed securities—residential		11,592		48		(42	)		11,598

Total short-term investments	$	98,958	$	315	$	(173	)	$	99,100

December 31, 2010
U.S. Government securities and sponsored entities	$	26,635	$	89	$	(11	)	$	26,713
Corporate debt securities		64,825		300		(51	)		65,074
Mortgage-backed securities—residential		11,451		80		(18	)		11,513

Total short-term investments	$	102,911	$	469	$	(80	)	$	103,300

The fair value and duration that investments, including cash equivalents, have been in a gross unrealized loss position as of December 31, 2011 and 2010 are as follows (in thousands):


	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2011
U.S. Government securities and sponsored entities	$	3,510	$	(10	)	$	—	$	—		$	3,510	$	(10	)
Foreign Government securities		3,778		(4	)		—		—			3,778		(4	)
Corporate debt securities		16,708		(108	)		1,006		(9	)		17,714		(117	)
Mortgage-backed securities—residential		3,508		(42	)		1		—			3,509		(42	)

Total	$	27,504	$	(164	)	$	1,007	$	(9	)	$	28,511	$	(173	)

December 31, 2010
U.S. Government securities and sponsored entities	$	8,839	$	(11	)	$	—	$	—		$	8,839	$	(11	)
Corporate debt securities		17,964		(51	)		—		—			17,964		(51	)
Mortgage-backed securities—residential		3,127		(16	)		72		(2	)		3,199		(18	)

Total	$	29,930	$	(78	)	$	72	$	(2	)	$	30,002	$	(80	)

For fixed income securities that have unrealized losses as of December 31, 2011, we have determined that we do not have the intent to sell any of these investments and it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, we have evaluated these fixed income securities and determined that no credit losses exist. Accordingly, management has determined that the unrealized losses on our fixed income securities as of December 31, 2011 were temporary in nature.

Amortized cost and estimated fair value of investments at December 31, 2011 is summarized by maturity date as follows (in thousands):


	Amortized cost		Fair value
Mature in less than one year	$	43,714	$	43,759
Mature in one to three years		55,244		55,341

Total short-term investments	$	98,958	$	99,100

For the year ended December 31, 2011, $0.2 million in realized gains from sale of investments were offset by $0.2 million in realized losses. For the year ended December 31, 2010, $0.4 million was recognized in net realized gains, which was comprised of $0.6 million in realized gains from sale of investments, partially offset by $0.2 million in realized losses. For the year ended December 31, 2009, $0.6 million was recognized in net realized gains, which was comprised of $0.9 million in realized gains from sale of investments, partially offset by $0.3 million in realized losses, which included $0.2 million of credit-related impairment charges on two corporate debt instruments. As of December 31, 2011 and 2010, net unrealized gains of $0.1 and $0.4 million, respectively, were included in OCI in the accompanying Consolidated Balance Sheets.

Fair Value Measurements

ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy as follows:

Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

Level 2: Inputs that are other than quoted prices included within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date for the duration of the instrument's anticipated life or by comparison to similar instruments; and

Level 3: Inputs that are unobservable or inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. These include management's own judgments about market participant assumptions developed based on the best information available in the circumstances.

We utilize the market approach to measure fair value of our fixed income securities. The "market approach" is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value of our fixed income securities are obtained using readily-available market prices from a variety of industry standard data providers, large financial institutions, and other third-party sources for the identical underlying securities. The fair value of our investments in certain money market funds is expected to maintain a Net Asset Value of $1 per share and, as such, is priced at the expected market price.

We obtain the fair value of our Level 2 financial instruments from several third party asset manager, custodian bank, and the accounting service providers. Independently, these service providers use professional pricing services to gather pricing data, which may include quoted market prices for identical or comparable instruments or inputs other than quoted prices that are observable either directly or indirectly. The service providers then analyze their gathered pricing inputs and apply proprietary valuation techniques, including consensus pricing, weighted average pricing, distribution-curve-based algorithms, or pricing models such as discounted cash flow techniques to provide a fair value for each security.

As part of this process, we engaged an pricing service to assist management in its pricing analysis and assessment of other-than-temporary impairment. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third party pricing service, the impairment analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party.

Our investments have been presented in accordance with the fair value hierarchy specified in ASC 820 as of December 31, 2011 and 2010 as follows (in thousands):


			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
December 31, 2011
Assets:
U.S. Government securities and sponsored entities	$	21,441	$	9,194	$	12,247	$	—
Foreign Government securities		3,778		—		3,778		—
Corporate debt securities		62,283		—		62,239		44
Mortgage-backed securities — residential		11,598		—		11,598		—
Money market funds		50,532		50,532		—		—

	$	149,632	$	59,726	$	89,862	$	44

Liabilities:
Liabilities for contingent consideration, current and noncurrent	$	8,704	$	—	$	—	$	8,704
Liability for self-insurance		1,640		—		—		1,640

	$	10,344	$	—	$	—	$	10,344

December 31, 2010
Assets:
U.S. Government securities and sponsored entities	$	26,713	$	4,778	$	21,935	$	—
Foreign Government securities		2,500		—		2,500		—
Corporate debt securities		69,272		—		69,223		49
Mortgage-backed securities — residential		11,513		—		11,513		—
Money market funds		73,864		73,864		—		—

	$	183,862	$	78,642	$	105,171	$	49

Liabilities:
Liability for contingent consideration, current and noncurrent	$	2,744	$	—	$	—	$	2,744

Included in money market funds is $50.5 and $73.9 million, which have been classified as cash equivalents as of December 31, 2011 and 2010, respectively. There were no foreign government or corporate debt securities classified as cash equivalents as of December 31, 2011. Included in foreign government and corporate debt securities is $2.5 and $4.2 million, respectively, which have been classified as cash equivalents as of December 31, 2010. Investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency. Investments in overnight money market mutual funds have been classified as Level 1 because these securities are valued based on quoted prices in active markets or they are actively traded at $1.00 Net Asset Value. There have been no transfers between Level 1 and 2 during the years ended December 31, 2011 and 2010.

Government agency investments and corporate debt instruments, including investments in asset-backed and mortgage-backed securities, have generally been classified as Level 2 because markets for these securities are less active or valuations for such securities utilize significant inputs, which are directly or indirectly observable.

At December 31, 2011 and 2010, one corporate debt instrument has been classified as Level 3 due to its significantly low level of trading activity.

Investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010 are reconciled as follows (in thousands):


	Level 3
	2011			2010
	Corporate Debt Securities			Corporate Debt Securities			Money Market Funds
Balance at January 1,	$	49		$	82		$	962
Included in interest and other income (expense), net		—			(10	)		33
Included in OCI		8			(5	)		—
Purchases, sales, and maturities		(13	)		(18	)		(995	)

Balance at December 31,	$	44		$	49		$	—

Impairment charges for the year then ended included in other income (expense), net, attributable to assets still held at the resspective year end	$	—		$	—		$	—

Money market funds of $1.0 million at January 1, 2010, net of reserves, represented funds in The Reserve Primary Fund ("Fund") reclassified from cash and cash equivalents as the Fund had adopted a plan of liquidation. As a result, the Fund's shares were not tradable at January 1, 2010. Our interest in the Fund was $14.8 million prior to their adoption of the liquidation plan. We received $14.6 million in liquidation of our interest in the Fund, net of reserves, which was invested in alternative money market funds, all of which are highly liquid and currently tradable at $1 per share Net Asset Value. We have no remaining exposure to the Fund.

We review investments in debt securities for other-than-temporary impairment whenever the fair value is less than the amortized cost and evidence indicates the investment's carrying amount is not recoverable within a reasonable period of time. We assess the fair value of individual securities as part of our ongoing portfolio management. Our other-than-temporary assessment includes reviewing the length of time and extent to which fair value has been less than amortized cost, the seniority and durations of the securities, adverse conditions related to a security, industry, or sector, historical and projected issuer financial performance, credit ratings, issuer specific news, and other available relevant information. To determine whether an impairment is other-than-temporary, we consider whether we have the intent to sell the impaired security or if it will be more likely than not that we will be required to sell the impaired security before a market price recovery and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.

In determining whether a credit loss existed, we used our best estimate of the present value of cash flows expected to be collected from each debt security. For asset-backed and mortgage-backed securities, cash flow estimates including prepayment assumptions were based on data from widely accepted third party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries, and changes in value. Expected cash flows were discounted using the effective interest rate implicit in the securities.

As a result of our adoption of ASC 320-10-65-1, Transition Related to FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, effective in the second quarter of 2009, we recorded a cumulative effect adjustment of $0.1 million, to reduce the cost of the identified security and retained earnings. In the fourth quarter of 2009, we identified two additional securities that were other-than-temporarily impaired at December 31, 2009 and recognized impairment losses of $0.2 million in other income (expense), net. We have determined that gross unrealized losses on short-term investments at December 31, 2011 and 2010 are temporary in nature because each investment meets our investment policy and credit quality requirements. We have the ability and intent to hold these investments until they recover their unrealized losses, which may not be until maturity. Evidence that we will recover our investments outweighs evidence to the contrary.

Accumulated other-than-temporary credit-related impairments charged to retained earnings and other income (expense), net, consists of the following:


	Impairments Charged to Retained Earnings		Impairments Recognized in Other Income (Expense), Net		Total
Accumulated Impairments, net attributable to assets still held at December 31, 2011, as of January 1, 2009	$	—	$	640	$	640
Impairments recognized in other income (expense), net		—		217		217
Cumulative effect adjustment upon adoption of ASC 320-10-65-1 as of April 1, 2009		58		—		58

Accumulated impairments, net, attributable to assets still held at December 31, 2011, at December 31, 2009	$	58	$	824	$	882
Impairments recognized in other income (expense), net		—		—		—

Accumulated impairments, net, attributable to assets still held at December 31, 2011, at December 31, 2010	$	58	$	824	$	882
Impairments recognized in other income (expense), net		—		—		—

Accumulated impairments, net, attributable to assets still held at December 31, 2011	$	58	$	824	$	882

No other-than-temporary impairments have been recognized related to factors that are not credit-related.

Minority Investment in Privately-Held Company

Other investments, included within other assets, consist of equity and debt investments in privately-held companies that develop products, markets, and services that are considered to be strategic to us. Each of these investments had been fully impaired in prior years. On September 1, 2011, we received the proceeds from the sale of one of these investments of $2.9 million.

Liabilities for Contingent Consideration

Acquisition-related current and noncurrent liabilities for contingent consideration (i.e., earnouts) related to the acquisitions of Alphagraph, Entrac, and Streamline in 2011, and Radius in 2010. The fair value of these earnouts is estimated to be $8.7 and $2.7 million as of December 31, 2011 and 2010, respectively, by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include discount rates between 4.9% and 6.3% and probability-adjusted revenue levels. Probability-adjusted revenue is a significant input that is not observable in the market, which ASC 820-10-35 refers to as a Level 3 input. These contingent liabilities have been reflected in the Consolidated Balance Sheet as of December 31, 2011, as a current liability of $5.4 million and a noncurrent liability of $3.3 million.

The 2011 and 2010 Radius earnout performance targets were achieved. Consequently, the fair value of the Radius earnout increased by $1.5 and $0.4 million as of December 31, 2011 and 2010, respectively. In accordance with ASC 805-30-35-1, changes in the fair value of contingent consideration subsequent to the acquisition date have been recognized in general and administrative expense.


Liabilities for Contingent Consideration (in thousands)
Fair value of Radius contingent consideration at July 2, 2010	$	2,350
Changes in valuation		394

Fair value at December 31, 2010	$	2,744
Fair value of Streamline contingent consideration at February 16, 2011		1,320
Fair value of Entrac contingent consideration at July 25, 2011		2,730
Fair value of Alphagraph contingent consideration at December 6, 2011		2,588
Changes in valuation		1,538
Less: Radius payment		(2,125	)
Foreign currency adjustment		(91	)

Fair value at December 31, 2011	$	8,704

Liability for Self-Insurance

Beginning in 2011, we are partially self-insured for certain losses related to employee medical and dental coverage, excluding employees covered by health maintenance organizations. We generally have an individual stop loss deductible of $125,000 per enrollee unless specific exposures are separately insured. We have accrued a contingent liability of $1.6 million as of December 31, 2011, which is not discounted, based upon an examination of historical trends, our claims experience, industry claims experience, actuarial analysis, and estimates. The primary estimates used in the development of our accrual at December 31, 2011 include total enrollment (including employee contributions), population demographics, and historical claims costs incurred, which are significant inputs that are not observable in the market, which ASC 820-10-35 refers to as a Level 3 inputs.


Liability for Self-Insurance (in thousands)
Fair value of self-insurance liability at December 31, 2010	$	—
Additions to reserve		11,840
Employee contributions		2,710
Less: insurance claims and administrative fees paid		(12,910	)

Fair value of self-insurance liability at December 31, 2011	$	1,640

Fair Value of Derivative Instruments

We have adopted the provisions of ASC 820 regarding nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The adoption of these provisions did not materially impact our financial position or results of operations.

We utilize the income approach to measure the fair value of our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates, and forward prices, and are therefore classified as Level 2 measurements. The fair value of our derivative assets and liabilities having notional amounts of $3.5 and $2.5 million as of December 31, 2011 and 2010, respectively, was not material.