Note 6 - Financial Instruments and Fair Value

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Text Block]

6 – Financial Instruments and Fair Value

Certain methods and assumptions were used by the Company in estimating the fair value of financial instruments at June 30, 2012.  The carrying value of current assets and current liabilities approximates the fair value due to the short maturity of these items.

The fair value of the Company’s long-term debt is based on secondary market indicators and is categorized in Level 2 of the fair value hierarchy.  Since the Company’s debt is not quoted, estimates are based on each obligation’s characteristics, including remaining maturities, interest rate, credit rating, collateral, amortization schedule and liquidity.  The carrying amount approximates fair value.

In prior years, the Company invested in interest-bearing short-term investments primarily consisting of investment-grade auction rate securities classified as available-for-sale and reported at fair value.  These types of investments were designed to provide liquidity through an auction process that reset the applicable interest rates at predetermined periods ranging from 1 to 35 days.  This reset mechanism was intended to allow existing investors to continue to own their respective interest in the auction rate security or to gain immediate liquidity by selling their interests at par.

As a result of the liquidity issues experienced in the global capital markets, auctions for investment grade securities held by the Company have failed.  An auction fails when there is insufficient demand.  However, a failed auction does not represent a default by the issuer.  The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop.  The Company has the intent and ability to hold these auction rate securities until liquidity returns to the market.  The Company does not believe that the lack of liquidity relating to its auction rate securities will have a material impact on its ability to fund operations.

If investments are deemed to be impaired, the Company determines whether the impairment is temporary or other than temporary.  If the impairment is deemed to be temporary, the Company records an unrealized loss in other comprehensive income.  If the impairment is deemed other than temporary, the Company records the impairment in the Company’s consolidated statement of operations.

As of June 30, 2012, the Company held auction rate securities with underlying tax-exempt municipal bonds that mature in 2030 that have a fair value of $6.6 million and a cost basis of $7.6 million.  These bonds have credit wrap insurance and a credit rating of Aa3 by a major credit rating agency.

The Company valued the auction rate securities at June 30, 2012 using a discounted cash flow model based on the characteristics of the individual securities, which the Company believes yields the best estimate of fair value. The first step in the valuation included a credit analysis of the security which considered various factors including the credit quality of the issuer, the instrument’s position within the capital structure of the issuing authority, and the composition of the authority’s assets including the effect of insurance and/or government guarantees. Next, the future cash flows of the instruments were projected based on certain assumptions regarding the auction rate market significant to the valuation including the auction rate market will remain illiquid and auctions will continue to fail causing the interest rate to be the maximum applicable rate.  This assumption resulted in discounted cash flow analysis being performed through 2019, the point at which the Company estimates the securities will be redeemed by the municipality.  The projected cash flows were then discounted using the applicable yield curve plus a 225 basis point liquidity premium added to the applicable discount rate.

The Company recorded a pre-tax impairment charge of $1.0 million on these investments in 2011.  The Company believes that the impairment is temporary and has recognized the impairment in accumulated other comprehensive loss.

The table below presents disclosures about the auction rate securities measured at fair value on a recurring basis in the Company’s financial statements as of June 30, 2012 and December 31, 2011 (in thousands):

	At June 30, 2012
			Fair Value Estimated Using
	Cost Basis Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Investment in auction rate securities	$	7,575	$	−	$	−	$	6,628

	At December 31, 2011
			Fair Value Estimated Using
	Cost Basis Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Investment in auction rate securities	$	7,575	$	−	$	−	$	6,628

Interest Rate Swap Agreements

The Company has entered into swap agreements to hedge against the potential impact of increases in interest rates on its floating-rate debt instruments.  Swap agreements that hedge exposures to changes in interest rates expose us to credit risk and market risk.  Credit risk is the potential failure of the counterparty to perform under the terms of the swap agreement.  The Company attempts to minimize this risk by entering into transactions with high-quality counterparties.  Market risk is the potential adverse effect on the value of the swap agreement that results from a decline in interest rates.  The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

At June 30, 2012, the Company had an aggregate $43.6 million notional amount of interest rate swap contracts, which have been designated as cash flow hedges, to pay fixed rates of interest and receive a floating interest rate based on LIBOR. The fixed interest rates specified in the interest rate swap contracts became effective on or about January 1, 2012.  The Company’s interest rate swaps qualify for cash flow hedge accounting treatment.  Unrealized gains or losses are recorded in accumulated other comprehensive income.  Realized gains and losses will be recognized in interest expense, if they occur. Amounts to be received or paid under the contracts will be recognized as interest expense over the life of the contracts.  There was no ineffectiveness for these swaps during the quarters ended June 30, 2011 and June 30, 2012.

The fair value of cash flow hedges is calculated as the present value of expected future cash flows, determined on the basis of forward interest rates and present value factors.  As such, the carrying amounts for these swaps are designated to be Level 2 fair values and totaled $2.2 million as of June 30, 2012.  The carrying value of these swaps is included in Other Long-Term Liabilities on the accompanying Consolidated Balance Sheet as of June 30, 2012.

As of June 30, 2012, the Company was party to derivative financial instruments as described in the following table (in thousands):

Agreement	Notional Amount		Fixed Interest Rate		Underlying Rate	Expiration Date	Fair Value
Interest Rate Swap	$	2,155	5.075	%	3 month LIBOR	July 1, 2015	$	(108	)
Interest Rate Swap		4,452	5.075	%	3 month LIBOR	July 1, 2015		(222	)
Interest Rate Swap		7,595	5.39	%	1 month LIBOR	December 31, 2014		(343	)
Interest Rate Swap		1,468	5.39	%	1 month LIBOR	December 31, 2014		(66	)
Interest Rate Swap		2,613	5.39	%	1 month LIBOR	December 31, 2014		(118	)
Interest Rate Swap		5,913	5.39	%	1 month LIBOR	December 31, 2014		(267	)
Interest Rate Swap		5,408	5.38	%	1 month LIBOR	June 29, 2015		(314	)
Interest Rate Swap		832	5.29	%	1 month LIBOR	June 30, 2015		(48	)
Interest Rate Swap		1,595	5.29	%	1 month LIBOR	June 30, 2015		(91	)
Interest Rate Swap		8,043	5.29	%	1 month LIBOR	June 30, 2015		(462	)
Interest Rate Swap		693	5.29	%	1 month LIBOR	June 30, 2015		(40	)
Interest Rate Swap		2,787	5.29	%	1 month LIBOR	June 30, 2015		(160	)

Fair values of derivative instruments are on the accompanying Consolidated Balance Sheet as of June 30, 2012 (in thousands):

		Fair Value at
Derivative Liabilities Designated as Hedging Instruments	Balance Sheet Location	June 30, 2012		December 31, 2011
Interest Rate Swaps	Other Long-Term Liabilities	$	2,239	$	2,233