Clearwire 2007 Annual Report Download - page 66

Download and view the complete annual report

Please find page 66 of the 2007 Clearwire annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 128

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128

rate of 3.6225% and to receive the three-month LIBOR on a notional value of $300.0 million for three years. The
second swap was entered on January 7, 2008, effective March 5, 2008, to pay a fixed rate of 3.5% and to receive the
three month LIBOR on a notional value of $300.0 million for two years. In accordance with SFAS No. 133, its
amendments and related guidance, the Company will treat the interest rate swaps as “cash-flow hedges” and will
record the fair value of the swaps at the end of each calendar quarter, starting March 31, 2008.
Foreign Currency Exchange Rates
We are exposed to foreign currency exchange rate risk as it relates to our international operations. We currently
do not hedge our currency exchange rate risk and, as such, we are exposed to fluctuations in the value of the
U.S. dollar against other currencies. Our international subsidiaries and equity investees generally use the currency
of the jurisdiction in which they reside, or local currency, as their functional currency. Assets and liabilities are
translated at exchange rates in effect as of the balance sheet date and the resulting translation adjustments are
recorded as a separate component of accumulated other comprehensive income (loss). Income and expense
accounts are translated at the average monthly exchange rates during the reporting period. The effects of changes in
exchange rates between the U.S. Dollar and the currency in which a transaction is denominated are recorded as
foreign currency transaction gains (losses) as a component of net loss. We do not expect the effects of changes in
exchange rates to be material.
Investment Risk
At December 31, 2007, we held available-for-sale short-term and long-term investments with a fair value of
$155.6 million and a cost of $162.9 million, of which investments with a fair value of $88.6 million and a cost of
$95.9 million were auction rate securities and $67.0 million were government and agency issues, bonds and
commercial paper. We regularly review the carrying value of our short-term and long-term investments and identify
and record losses when events and circumstances indicate that declines in the fair value of such assets below our
accounting basis are other-than-temporary, which we experienced with our auction rate securities during the year
ended December 31, 2007. The fair values of our investments are subject to significant fluctuations due to volatility
of the credit markets in general, company-specific circumstances, and changes in general economic conditions.
Based on the fair value of the auction rate securities we held at December 31, 2007 of $88.6 million, an assumed
15%, 30%, and 50% adverse change to market prices of these securities would result in a corresponding decline in
total fair value of approximately $13.3 million, $26.6 million, or $44.3 million.
Beginning in August 2007, the auctions failed to attract buyers and sell orders could not be filled. Current
market conditions are such that we are unable to estimate when the auctions will resume. While we continue to earn
interest on these investments at the maximum contractual rate, the estimated fair value of these auction rate
securities no longer approximates cost and until the auctions are successful the investments are not liquid. We may
not have access to these funds until a future auction on these investments is successful.
Our investments in auction rate securities represent interests in collateralized debt obligations supported by
preferred equity securities of small to medium sized insurance companies and financial institutions and asset
backed capital commitment securities supported by high grade, short term commercial paper and a put option from
a monoline insurance company. These auction rate securities were rated AAA/Aaa or AA/Aa by Standard & Poors
and Moody’s rating services at the time of purchase and their ratings have not changed as of December 31, 2007.
However, some of the securities remain subject to review for possible downgrade. Any downgrade may result in
further declines in the estimated fair value of the securities as a result of the perceived increase in risk associated
with an investment in the securities.
In addition to the above mentioned securities, the Company holds one commercial paper security issued by a
structured investment vehicle that was placed in receivership in September 2007 for which an insolvency event was
declared by the receiver in October 2007. The Issuer invests in residential and commercial mortgages and other
structured credits including sub-prime mortgages. Based on information received from the receiver, we expect a
restructuring plan for this security to be implemented by mid 2008. This restructuring plan may result in an
additional decline in the estimated fair value of our investments.
58