Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements
9 Months Ended
Sep. 30, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements
(10) Fair Value Measurements

The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value.  The standard is applicable whenever assets and liabilities are measured at fair value.  
The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;
Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments,  quoted  prices  for identical or similar instruments in inactive
markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2011, and the level they fall within the fair value hierarchy (in thousands):
Amounts Recorded
at Fair Value
Financial Statement Classification
Fair Value Hierarchy
Fair Value
September 30,
Fair Value
December 31,
Non-COLI assets held in  DSC Plan
Other assets
Level 1
$   280
$ 1,636
Deferred compensation liability related to the DSC Plan
Deferred compensation
Level 2
$ 8,260
$ 6,002
Interest rate swaps
Accrued expenses
Level 2
$ 1,355
$         -
Earn-out obligation- current
Accrued expenses
Level 3
$ 4,285
$         -
Earn-out obligations - long-term
Earn-out obligations
Level 3
$ 7,807

Changes in the fair value of the Non-COLI assets held in the deferred supplemental compensation plan, as well as changes in the related deferred compensation obligation, are recorded as selling, general and administrative expenses.
We account for our interest rate swap agreements under the provisions of ASC 815, and have determined that our swap agreements qualify as highly effective hedges. Accordingly, the fair value of the swap agreements, which is a liability of approximately $1.4 million at September 30, 2011, has been reported in accrued expenses.  The offset, net of an income tax effect of approximately $525 thousand, is included in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheet. The amounts paid and received on the swap agreements will be recorded in interest expense as yield adjustments in the period during which the related floating-rate interest is incurred. We determine the fair value of the swap agreements based on a valuation model using market data inputs.

We determined the fair value of the earn-out obligations related to the Akimeka and WBI acquisitions by using a valuation model that included the evaluation of all possible outcomes and the application of an appropriate discount rate.  At the end of each reporting period, the fair value of the contingent consideration is re-measured and any changes are recorded as contract costs. The fair value of the Akimeka earn-out obligation decreased approximately $608 thousand and $1.6 million for the three and nine months ended September 30, 2011, respectively. The fair value of the WBI earn-out obligation increased $30 thousand between the acquisition date and September 30, 2011.

The following table provides a reconciliation of the beginning and ending balance of the earn-out obligations measured at fair value on a recurring basis that used significant unobservable inputs (Level 3).

Earn-out obligations
Balance as of December 31, 2010
  $ -     $ 7,807     $ 7,807  
Fair value adjustment included in earnings
     -       (1,533 )     (1,533 )
Additional earn-out obligations
    4,285       10,962       15,247  
Balance as of September 30, 2011
  $ 4,285     $ 17,236     $ 21,521