From 2001 10-K and 2002 Q3 10-Q (in that order)
3. Cash Equivalents and Marketable Securities
The Company invests its excess cash in debt instruments of financial institutions, of corporations with strong credit ratings, in U.S. government obligations, and in money market funds and certificates of deposit in financial institutions. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Cash equivalents are short-term, highly liquid investments with original maturities of less than three months. Cash equivalents of $43.0 million and $15.3 million at December 31, 2001 and 2000, respectively, are primarily in commercial paper, asset backed securities, federal agency discount notes and money market funds.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk. Our investment portfolio is maintained in accordance with our investment policy which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. No investments in equity securities are made in our investment portfolio which consists of cash equivalents and marketable securities. The average maturity of our investments is approximately nine months. Our investments are all classified as available-for-sale securities.
To assess our interest rate risk, we performed a sensitivity analysis projecting an ending fair value of our cash equivalents and marketable securities using the following assumptions: a 12-month time horizon, a 9-month average maturity and a 150-basis-point increase in interest rates. This pro forma fair value would have been $1.3 million lower than the reported fair value of our investments at December 31, 2001, and $1.0 million lower than the reported fair value at September 30, 2002. At September 30, 2002, our unrealized gain on marketable securities was $1.0 million compared with $0.8 million at December 31, 2001.
Our rate of return on investments, excluding realized gains on the sales of investments, has decreased as the Federal Reserve Board has lowered interest rates. Some of our investments were purchased prior to the reductions in interest rates, and currently are yielding higher returns than we could expect when reinvesting the proceeds upon sale or maturity. Thus, our interest yields and investment income are expected to be lower in 2002 than in 2001.
The fair market value of floating interest rate debt is subject to interest rate risk. Generally, the fair market value of floating interest rate debt will vary as interest rates increase or decrease. Based on our market-risk-sensitive instruments outstanding at September 30, 2002, and December 31, 2001, we believe that there were no material market risk exposures to our financial position, results of operations or cash flows as of such dates. |
