These excerpts taken from the ORB 10-K filed Mar 2, 2009.
The company accounts for its investments in auction-rate securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. These investments are classified as available-for-sale securities at the time of purchase and the company re-evaluates such designation as of each balance sheet date.
The companys investments in auction-rate securities are reported at fair value. The company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the companys ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. The company records an impairment expense to the extent that the carrying value exceeds the estimated fair market value of the securities held and the decline in value is determined to be other-than-temporary. Temporary changes in fair value are included in accumulated other comprehensive income (loss), a component of stockholders equity.
As of December 31, 2008 and 2007, the company held seven auction-rate securities which are classified as available for sale securities and non-current assets on the companys balance sheet. These securities had an initial cost basis of $34.5 million. Contractual maturities for certain of these auction-rate securities are 16 years or greater and the remaining securities have no fixed maturity. Auction-rate securities are normally structured to provide liquidity through an auction process that resets the applicable interest rate at predetermined calendar intervals. This mechanism allows existing investors either to roll over or liquidate their holdings by selling such securities at par. Since the third quarter of 2007 and through December 31, 2008, the auctions, which occur approximately every 28 days for the auction-rate securities held by the company, have not had sufficient buyers to cover investors sell orders, resulting in unsuccessful auctions. These unsuccessful auctions resulted in a resetting of the interest rate paid on the securities until the next auction date, at which time the process repeated.
The company estimated that the fair market value of these auction-rate securities at December 31, 2008 and 2007 was $16.7 million and $28.0 million, respectively. The company has estimated the fair value of these securities using a discounted cash flow analysis which considered the following key inputs: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions and the relevant risk associated with each security; and (iii) the time horizon that the market value of each security could return to its cost and be sold. The discount rates used in the present value calculations are based on yields on U.S. Treasury securities with similar time horizons plus interest rate risk premiums that are intended to compensate for general market risk and the risk specific to each security. The risk premiums are based upon current credit default swap pricing market data for similar or related securities or credit spreads for corporate bonds with similar credit ratings. Under SFAS No. 157, such valuation assumptions are defined as Level 3 inputs.
In 2008, the company recorded other-than-temporary impairment charges of $17.8 million, pertaining to all of the auction-rate securities. The company determined to record these other-than-temporary impairment charges based on the companys assessment that it is likely that the fair value of the auction-rate securities will not fully recover in the foreseeable future, given the duration, severity and continuing declining trend of the fair values of these securities, as well as the uncertain financial condition and near-term prospects of the securities issuers. In 2007 the company had recorded temporary impairment charges totaling $6.5 million. These temporary impairment charges were reversed in 2008 as a result of updating the companys impairment assessment.
The changes in the fair values of the auction-rate securities during 2008 and 2007 were as follows (in thousands):
At this time it is uncertain if or when the liquidity issues relating to these investments will improve, and there can be no assurance that the market rate for auction-rate securities will stabilize. The fair value of the auction-rate securities could change significantly in the future and the company may be required to record additional temporary or other-than-temporary impairment charges if there are further reductions in fair value in future periods.
This excerpt taken from the ORB 10-K filed Feb 22, 2008.
As of December 31, 2007, the company had investments in auction-rate securities with a total cost basis of $34.5 million. These investments are highly rated debt and preferred stock securities with nominal maturities of 18 years or greater and are classified as available-for-sale securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Auction-rate securities are normally structured to provide liquidity through an auction process that resets the applicable interest rate at predetermined calendar intervals, generally every 28 days. This mechanism allows existing investors either to roll over their holdings, whereby they will continue to own their respective securities, or liquidate their holdings by selling such securities at par. Since the third quarter of 2007, these auctions have not had sufficient buyers to cover investors sell orders, resulting in unsuccessful auctions. When an auction is unsuccessful, the interest rate paid on the investment is re-set to a level predetermined by the security and remains in effect until the next auction date, at which time the process repeats. As of December 31, 2007, the companys investments in auction-rate securities were subject to auctions that have been unsuccessful. While these investments are currently highly rated
securities, it is uncertain if or when the liquidity issues relating to these investments will improve, and there can be no assurance that the market for auction-rate securities will stabilize.
As of December 31, 2007, the companys auction-rate securities were written down from their cost of $34.5 million to their estimated fair value of $28.0 million, based on the companys analysis which included market information provided by the broker-dealer of these securities and discounted cash flow analyses. The company recorded a temporary impairment charge of $6.5 million in the fourth quarter of 2007 that was recorded in other comprehensive income within stockholders equity, in conformity with SFAS No. 115. In addition, the company classified the auction-rate securities as non-current investments on its balance sheet. The company concluded that the impairment that occurred in 2007 was temporary because (i) the company believes that the decline in market value that occurred in 2007 is due to general market conditions, (ii) the auction-rate securities continue to be of high credit quality and interest is paid as due and (iii) the company has the intent and ability to hold the auction-rate securities until a recovery in market value occurs. The fair value of these securities could change significantly in the future and the company may be required to record additional temporary or other-than-temporary impairment charges if there are further reductions in fair value in future periods.