UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2005
OR
For the transition period from to
Commission file number: 0-26642
MYRIAD GENETICS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction
of incorporation or organization)
Registrant’s telephone number, including area code: (801) 584-3600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 21, 2005 the registrant had 30,954,785 shares of $0.01 par value common stock outstanding.
1
INDEX TO FORM 10-Q
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Signatures
2
MYRIAD GENETICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Current assets:
Cash and cash equivalents
Marketable investment securities
Prepaid expenses
Trade accounts receivable, less allowance for doubtful accounts of $1,595 at Sep. 30, 2005 and $1,395 at June 30, 2005
Other receivables
Total current assets
Equipment and leasehold improvements:
Equipment
Leasehold improvements
Less accumulated depreciation and amortization
Net equipment and leasehold improvements
Other assets
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Total current liabilities
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding
Common stock, $0.01 par value, 60,000 shares authorized; issued and outstanding 30,948 at Sep. 30, 2005 and 30,862 at June 30, 2005
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
See accompanying notes to condensed consolidated financial statements (Unaudited).
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Revenues:
Predictive medicine revenue
Research revenue
Total revenues
Costs and expenses:
Predictive medicine cost of revenue
Research and development expense
Selling, general and administrative expense
Total costs and expenses
Operating loss
Other income (expense):
Interest income
Other
Net loss
Basic and diluted loss per share
Basic and diluted weighted average shares outstanding
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Loss on disposition of assets
Bad debt expense
Share-based compensation expense
Changes in operating assets:
Trade accounts receivable
Net cash used in operating activities
Cash flows from investing activities:
Capital expenditures
Purchases of marketable investment securities
Proceeds from sales and maturities of marketable investment securities
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from issuance of common stock
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying condensed consolidated financial statements have been prepared by Myriad Genetics, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly all financial statements in accordance with accounting principles generally accepted in the United States. The condensed consolidated financial statements herein should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2005, included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2005. Operating results for the three month period ended September 30, 2005 may not necessarily be indicative of results to be expected for any other interim period or for the full year.
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On July 1, 2005 the Company adopted the provisions of Financial Accounting Standards Board Statement No. 123R, Share-Based Payment(Statement 123R). Statement 123R sets accounting requirements for “share-based” compensation to employees, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.
In 2003 the Company adopted the 2003 Employee, Director and Consultant Stock Option Plan (the 2003 Plan) under which 2,700,000 shares of common stock have been reserved for issuance upon the exercise of options that the Company grants from time to time. Additional shares represented by options previously granted under the Company’s 2002 Amended and Restated Employee, Director and Consultant Stock Option Plan (the 2002 Plan) which are canceled or expire after the date of stockholder approval of the 2003 Plan without delivery of shares of stock by the Company and any shares which have been reserved but not granted under the 2002 Plan as of the date of stockholder approval of the 2003 Plan are available for grant under the 2003 Plan. The number of shares, terms, and exercise period are determined by the board of directors on an option-by-option basis. Options generally vest ratably over four or five years and expire ten years from the date of grant. The exercise price of options granted is equivalent to the fair market value of the stock at the date of grant. The Company also has an Employee Stock Purchase Plan under which a maximum of 600,000 shares of common stock may be purchased by eligible employees.
The Company’s share-based payment plans are now accounted for under Statement 123R. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants for the three months ended September 30, 2005: risk-free interest rate of 4.0%; expected dividend yield of 0%; expected lives ranging from 2.3 year to 5.3 years; and expected volatility ranging from
6
46% to 74%. For the three months ended September 30, 2004 the weighted-average assumptions used for grants were as follows: risk-free interest rate of 3.4%; expected dividend yield of 0%; expected life of 6.1 years; and expected volatility of 52%. Expected option lives and volatilities are based on historical data of the Company.
A summary of option activity under our stock option plans for the three months ending September 30, 2005 is as follows:
Options outstanding at July 1, 2005
Plus options granted
Less:
Options exercised
Options canceled or expired
Options outstanding at September 30, 2005
Options exercisable at September 30, 2005
Weighted average fair value of options granted
Share-based compensation expense included in the statement of operations for the three months ended September 30, 2005 was approximately $239,000. As of September 30, 2005, there was approximately $5.2 million of total unrecognized share-based compensation cost related to share-based compensation granted under our plans that will be recognized over a weighted-average period of 2.8 years. The total intrinsic value of options exercised during the three months ended September 30, 2005 was approximately $558,000. The total fair value of shares vested during the three months ended September 30, 2005 was $0.
Statement 123R applies only to awards granted after the required effective date. Awards granted prior to the Company’s implementation of Statement 123R were accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, no stock-based employee compensation cost is reflected in net loss in the accompanying condensed consolidated statement of operations for the three months ended September 30, 2004, as all options granted under the Company’s plans had exercise prices equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
7
Compensation, to stock-based employee compensation for periods presented prior to the Company’s adoption of Statement 123R:
Net loss, as reported
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax related effects
Pro forma net loss
Loss per share:
Basic and diluted – as reported
Basic and diluted – pro forma
The components of the Company’s comprehensive loss are as follows (in thousands):
Unrealized gain (loss) on available-for-sale securities
Comprehensive loss
Loss per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive potential common shares outstanding during the period. Stock options and warrants are considered to be potential common shares.
Basic loss per common share is the amount of loss for the period available to each share of common stock outstanding during the reporting period. Diluted loss per share is the amount of loss for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. In calculating loss per common share the net loss and the weighted average common shares outstanding were the same for both the basic and diluted calculation.
As of September 30, 2005 and 2004, there were antidilutive potential common shares of 8,001,854 and 6,630,433, respectively. Accordingly, these potential common shares were not included in the computation of diluted loss per share for the periods presented, but may be dilutive to future basic and diluted earnings per share.
The Company’s business units have been aggregated into three reportable segments: (i) research, (ii) predictive medicine, and (iii) drug development. The research segment is focused on the
8
discovery of genes and protein pathways related to major common diseases. The predictive medicine segment provides testing to determine predisposition to common diseases. The drug development segment is focused on the development of therapeutic products for the treatment and prevention of major diseases.
The accounting policies of the segments are the same as those described in the basis of presentation (note 1). The Company evaluates segment performance based on results from operations before interest income and expense and other income and expense.
Three months ended Sep. 30, 2005:
Revenues
Segment operating gain (loss)
Three months ended Sep. 30, 2004:
Total operating loss for reportable segments
9
We are a leading biotechnology company focused on the development and marketing of novel therapeutic and predictive medicine products. We employ a number of proprietary technologies that permit us to understand the genetic basis of human disease and the role that genes and their related proteins play in the onset and progression of disease. We use this information to guide the development of new healthcare products that will treat major diseases and assess a person’s risk of disease later in life.
We believe that the future of medicine lies in the creation of new classes of drugs that treat the underlying cause, not just the symptoms, of disease and that may be useful in disease prevention. By understanding the genetic basis of disease, we believe we will be able to develop drugs that are safer and more efficacious. In addition, we believe that advances in the emerging field of predictive medicine will improve our ability to determine which patients are subject to a greater risk of developing these diseases and who therefore would benefit from preventive therapies.
Myriad researchers have made important discoveries in the fields of cancer, Alzheimer’s disease and infectious diseases such as AIDS. These discoveries point to novel disease pathways that may pave the way for the development of new classes of drugs. We intend to develop and, subject to regulatory approval, market our therapeutic products in the areas of cancer, Alzheimer’s disease and viral disease.
Therapeutic products in development
We currently have three drug candidates in six clinical trials and a number of drug candidates in late-stage preclinical development. Our most advanced drug development programs are described below:
MPC-6827: drug candidate for solid cancer tumors and brain metastases. Our drug candidate MPC-6827 is a novel, small-molecule tubulin inhibitor that is being studied in two Phase 1 human clinical trials. These trials use an escalating dose regimen designed to evaluate the safety and pharmacokinetic
10
profile of MPC-6827 in patients with advanced solid tumors and metastatic brain tumors, respectively. In preclinical studies, MPC-6827 showed better activity against a range of human tumors in mouse xenografts than the standard of care treatments for those cancers. In addition, MPC-6827 demonstrated the ability to effectively cross the blood-brain barrier and was not subject to multiple drug resistance. This drug candidate has demonstrated activity in preclinical studies against tumors of the prostate, breast, pancreas, colon and skin (melanoma). According to the American Cancer Society, these cancers are expected to account for approximately 642,000 new cases in 2005 in the United States alone. In addition, according to the National Cancer Institute, it is estimated that there will be as many as 170,000 new cases of brain metastases in 2005.
11
Therapeutic product pipeline
Molecule
Therapeutic Area
Status
Flurizan
MPC-6827
MPC-2130
MPI-49839
MPC-0920
MPC-4505
Predictive medicine products
Predictive medicine analyzes genes and their mutations to assess an individual’s risk for developing disease later in life. Armed with this risk assessment information, individuals can increase surveillance and take action to prevent or delay the onset of disease.
To date, we have launched four commercial predictive medicine products. We market these products through our own 115-person sales force in the United States and we have entered into marketing collaborations with other organizations in selected foreign countries. Predictive medicine revenues were $21.5 million for the three months ended September 30, 2005, an increase of 49% over the same three months in 2004. Our predictive medicine gross profit margin was 73% for the three months ended September 30, 2005, compared to 71% for the same three months in 2004. Our current commercial predictive medicine products are described below:
12
We have devoted substantially all of our resources to undertaking our drug discovery and development programs, operating our predictive medicine business, and continuing our research and development efforts. Our revenues have consisted primarily of sales of predictive medicine products and research payments. We have yet to attain profitability and, for the three months ended September 30, 2005, we had a net loss of $9.2 million. As of September 30, 2005 we had an accumulated deficit of $188.5 million.
We expect to incur losses for at least the next several years, primarily due to the expansion of our drug discovery and development efforts, the initiation and continuing conduct of human clinical trials, the launch of new predictive medicine products, the continuation of our internal research and development programs, and expansion of our facilities. Additionally, we expect to incur substantial sales, marketing and other expenses in connection with building our pharmaceutical and predictive medicine businesses. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial.
Critical Accounting Policies
Critical accounting policies are those policies which are both important to the portrayal of a company’s financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows:
Revenue Recognition. Research revenues include revenues from research agreements, milestone payments, and technology licensing agreements. In applying the principles of SAB 104 to research and technology license agreements we consider the terms and conditions of each agreement separately to arrive at a proportional performance methodology of recognizing revenue. Such methodologies involve recognizing revenue on a straight-line basis over the term of the agreement and based on costs incurred relative to the total estimated contract costs (cost-to-cost method). We make adjustments, if necessary, to the estimates used in our cost-to-cost calculations as work progresses and we gain experience. The principal costs under these agreements are for personnel expenses to conduct research and development
13
but also include costs for materials and other direct and indirect items necessary to complete the research under these agreements. Actual results may vary from our estimates. Payments received on uncompleted long-term contracts may be greater than or less than incurred costs and estimated earnings and have been recorded as other receivables or deferred revenues in the accompanying consolidated balance sheets. We recognize revenue from milestone payments as agreed-upon events representing the achievement of substantive steps in the development process are achieved and where the amount of the milestone payments approximates the value of achieving the milestone. We recognize revenue from up-front nonrefundable license fees on a straight-line basis over the period of our continued involvement in the research and development project.
Predictive medicine revenues include revenues from the sale of predictive medicine products, related marketing agreements, and forensic DNA analysis fees. Predictive medicine revenue is recognized upon completion of the test or analysis and communication of results. Up-front payments related to marketing agreements are recognized ratably over the life of the agreement.
Allowance for Doubtful Accounts. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Trade accounts receivable are comprised of amounts due from sales of our predictive medicine products. We analyze trade accounts receivable and consider historic experience, customer creditworthiness, facts and circumstances specific to outstanding balances, and payment term changes when evaluating the adequacy of the allowance for doubtful accounts. Changes in these factors could result in material adjustments to the expense recognized for bad debt.
Investments in Privately-Held Companies. We review the valuation of our investments in privately-held biotechnology and pharmaceutical companies for possible impairment as changes in facts and circumstances indicate that impairment should be assessed. The amount of impairment, if any, and valuation of these investments are based on our estimates and, in certain circumstances, the completion of independent, third-party appraisals of the investments. Inherent in these estimates and appraisals are assumptions such as the comparability of the investee to similar publicly traded companies, the value of the investee’s underlying research and development efforts, the likelihood that the investee’s current research projects will result in a marketable product, and the investee’s expected future cash flows. Accordingly, the amount recognized by us upon ultimate liquidation of these investments may vary significantly from the estimated fair values at September 30, 2005.
Results of Operations for the Three Months Ended September 30, 2005 and 2004
Predictive medicine revenues for the three months ended September 30, 2005 were $21.5 million compared to $14.4 million for the same three months in 2004, an increase of 49%. Predictive medicine revenue is comprised primarily of sales of predictive medicine products, and also includes some marketing fees and forensic DNA analysis fees. Increased sales, marketing, and education efforts, coupled with publications concerning the clinical utility of our products have resulted in wider acceptance of our products by the medical community and increased revenues for the three months ended September 30, 2005. We sometimes experience seasonal slowness in sales, particularly in the quarters ending September 30 and March 31, the effects of which may be difficult to understand during periods of growth. There can be no assurance that predictive medicine revenues will continue to increase at historical rates.
Research revenues for the three months ended September 30, 2005 were $3.6 million compared to $2.3 million for the same three months in 2004. This 57% increase in research revenue is primarily attributable to revenues associated with the delivery of research data pursuant to a research collaboration which resulted in increased research revenues of approximately $2.5 million for the three months ended September 30, 2005 compared to the same three months in 2004. This increase was partially offset by the successful completion of one of our research collaborations in the prior year, which resulted in decreased research revenues of approximately $1.2 million. We expect that our continued focus will be on our internal drug development and predictive medicine programs and we plan to continue to de-emphasize
14
external research collaborations. Research revenue from our research collaboration agreements is recognized using a proportional performance methodology. Consequently, as these programs progress and costs increase or decrease, revenues may increase or decrease proportionately.
Predictive medicine cost of revenue for the three months ended September 30, 2005 was $5.8 million compared to $4.2 million for the same three months in 2004. This increase of 37% in predictive medicine cost of revenue is primarily due to the 49% increase in predictive medicine revenues for the three months ended September 30, 2005 compared to the same three months in 2004. This increase was partially offset by a reduction in royalty obligations as well as technology improvements and efficiency gains in the operation of our predictive medicine business. These changes also contributed to an increase in our gross profit margin, which was 73% for the three months ended September 30, 2005 compared to 71% for the same three months in 2004. There can be no assurance that predictive medicine gross profit margins will continue to increase at historical rates.
Research and development expenses for the three months ended September 30, 2005 were $18.5 million compared to $13.1 million for the same three months in 2004. This increase of 41% was primarily due to increased costs associated with our clinical trials, including our Phase 3 study and follow-on Phase 2 study of Flurizan in patients with mild Alzheimer’s disease, our Phase 2b study of Flurizan in patients with pre-metastatic prostate cancer and our three Phase 1 trials for our cancer compounds MPC-6827 and MPC-2130. These increases added approximately $4.0 million to our research and development costs for the three months ended September 30, 2005 compared to the same three months in 2004. Increases in our drug discovery and drug development programs added approximately $1.4 million to our research and development costs for the three months ended September 30, 2005 compared to the same three months in 2004. We expect to incur significant increases in our research and development expenses over the next several years as we expand clinical trials for our product candidates currently in clinical development, including Flurizan, advance our other product candidates into clinical trials, and expand our research and development activities, and we expect that these expenses will continue to fluctuate from quarter to quarter based on changes in our research programs and the progression of our drug development programs.
Selling, general and administrative expenses for the three months ended September 30, 2005 were $10.9 million compared to $10.0 million for the same three months in 2004. Selling, general and administrative expenses consist primarily of salaries, commissions and related personnel costs for sales, marketing, executive, legal, finance, accounting, human resources, business development, allocated facilities expenses and other corporate expenses. This increase of 9% was primarily attributable to general increases in costs to support growth in our predictive medicine business and therapeutic development efforts. We expect our selling, general and administrative expenses will continue to fluctuate depending on the number and scope of new product launches and our drug discovery and drug development efforts.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable investment securities decreased $10.8 million or 10% from $113.8 million at June 30, 2005 to $103.0 million at September 30, 2005. This decrease in cash, cash equivalents, and marketable investment securities is primarily attributable to increased expenditures for our ongoing clinical trials, internal research and drug development programs and other expenditures incurred in the ordinary course of business. As a result of changes in interest rates, interest income for the three months ended September 30, 2005 was $0.8 million, compared to $0.6 million for the same three in 2004, an increase of 28%.
Net cash used in operating activities was $11.0 million during the three months ended September 30, 2005 compared to $11.8 million used in operating activities during the same three months in 2004. Trade accounts receivable increased $2.0 million between June 30, 2005 and September 30, 2005, primarily due to increases in predictive medicine sales during the same period. Prepaid expenses increased by $1.3 million between June 30, 2005 and September 30, 2005, primarily due to the purchase of lab supplies.
15
Accounts payable decreased by $2.2 million between June 30, 2005 and September 30, 2005, primarily due to payments for purchases of equipment and amounts due in relation to our clinical trials. Accrued liabilities decreased by $1.5 million between June 30, 2005 and September 30, 2005, primarily as a result of payments for predictive medicine sales and marketing commissions. Deferred revenue, representing the difference in collaborative payments received and research revenue recognized, increased by $2.7 million between June 30, 2005 and September 30, 2005.
Our investing activities used cash of $1.0 million during the three months ended September 30, 2005 and used cash of $6.9 million during the same three months in 2004. Investing activities were comprised primarily of purchases and maturities of marketable investment securities and capital expenditures for research equipment.
Financing activities provided cash of $1.1 million during the three months ended September 30, 2005 and provided cash of $0.2 million during the same three months in 2004, primarily due to funds received from the exercise of stock options.
We believe that with our existing capital resources, we will have adequate funds to maintain our current and planned operations for at least the next two years, although no assurance can be given that changes will not occur that would consume available capital resources before such time and we may need or want to raise additional financing within this period of time. Our future capital requirements, cash flows, and results of operations could be affected by and will depend on many factors that are currently unknown to us, including:
We have an effective shelf registration statement on Form S-3 (Registration No. 333-123914) on file with the Securities and Exchange Commission for the sale of up to $300 million of various types of securities upon filing of a prospectus supplement with the SEC. This filing includes the securities that had been
16
available for sale under our shelf registration statement on Form S-3 (Registration No. 333-73124) filed previously on November 9, 2001. Because of our significant long-term capital requirements, we may access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at such time.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, sales, or operating results during the periods presented.
Certain Factors That May Affect Future Results of Operations
The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to: our inability to further identify, develop and achieve commercial success for new products and technologies; our ability to discover drugs that are safer and more efficacious than our competitors; our ability to develop predictive medicine products that help assess which patients are subject to greater risk of developing diseases and who would therefore benefit from new preventive therapies; the possibility of delays in the research and development necessary to select drug development candidates and delays in clinical trials; the risk that clinical trials may not result in marketable products; the risk that we may be unable to successfully finance and secure regulatory approval of and market our drug candidates, or that clinical trials will be completed on the timelines we have estimated; uncertainties about our ability to obtain new corporate collaborations and acquire new technologies on satisfactory terms, if at all; the development of competing products and services; our ability to protect our proprietary technologies; patent-infringement claims; risks of new, changing and competitive technologies and regulations in the United States and internationally; and other factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2005, which has been filed with the Securities and Exchange Commission.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Quarterly Report or in any document incorporated by reference might not occur. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report or the date of any document incorporated by reference in this Quarterly Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
We maintain an investment portfolio in accordance with our Investment Policy. The primary objectives of our Investment Policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our Investment Policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.
17
Our investments consist of securities of various types and maturities of three years or less, with a maximum average maturity of 12 months. These securities are classified as available-for-sale, which are recorded on the balance sheet at fair market value with unrealized gains or losses reported as part of accumulated other comprehensive income. Gains and losses on investment security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned. A decline in the market value of any marketable investment security below cost that is deemed other than temporary results in a charge to earnings and establishes a new cost basis for the security.
The securities held in our investment portfolio are subject to interest rate risk. Changes in interest rates affect the fair market value of the marketable investment securities. After a review of our marketable securities as of September 30, 2005, we have determined that in the event of a hypothetical ten percent increase in interest rates, the resulting decrease in fair market value of our marketable investment securities would be insignificant to the consolidated financial statements as a whole.
In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
18
PART II - Other Information
Neither the Company nor any of its subsidiaries is a party to any material legal proceedings.
None.
(a) Exhibits
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 26, 2005
20