Support.com 2009 Annual Report Download - page 37

Table of Contents
As of December 31, 2009, we held $59.9 million in investments (excluding cash and cash equivalents), which consisted primarily of government debt
securities, ARS, corporate notes and bonds, and commercial paper. The weighted average interest rate of our portfolio was approximately 2.46% at December 31,
2009. A decline in interest rates over time would reduce our interest income from our investments. A decrease in interest rates of 100 basis points would cause a
corresponding decrease in our annual interest income of approximately $599,000.
At December 31, 2009 and 2008 we had investments in AAA-rated ARS with various state student loan authorities with estimated fair values of
$22.7 million and $15.8 million, respectively. The student loans made by these authorities are substantially guaranteed by the federal government through the
Federal Family Education Loan Program (FFELP). ARS are long-term floating rate bonds tied to short-term interest rates. After the initial issuance of the
securities, the interest rate on the securities is reset periodically, at intervals established at the time of issuance (e.g., every seven days, twenty-eight days,
thirty-five days, or every six months), based on market demand, if the auctions are successful. ARS are bought and sold in the marketplace through a competitive
bidding process often referred to as a “Dutch auction.” If there is insufficient interest in the securities at the time of an auction, the auction may not be completed
and the ARS then pays a default interest rate. Following such a failed auction, we cannot access our funds that are invested in the corresponding ARS until a
future auction of these investments is successful, new buyers express interest in purchasing these securities in between reset dates, issuers establish a different
form of financing to replace these securities or final payments become due according to contractual maturities. Commencing in February 2008, conditions in the
global credit markets resulted in failed auctions for all of the ARS we held. In the near term, our ability to liquidate our investments in ARS or fully recover the
carrying values may be limited or not exist.
In August 2008, UBS, the broker-dealer for most of our ARS, announced a settlement under which it has offered to provide liquidity solutions for, or
purchase, the ARS held by its institutional clients. In October 2008, UBS extended an offer to us to sell our eligible ARS at par value back to UBS beginning
June 30, 2010 through July 2, 2012. We believe that all of the UBS ARS we hold qualify as “eligible” for purposes of the UBS rights offer. Under the offer, UBS
will have sole discretion without prior notice to us, to sell our eligible ARS and return par value to us from June 30, 2010 through July 2, 2012. In November
2008, we elected to accept the offer from UBS, which gives us the option to sell back to UBS a total of $20.5 million of our ARS at par value at any time from
June 30, 2010 through July 2, 2012. Upon our acceptance of the UBS rights offer, we elected to value the ARS put option at fair value. Please refer to
“Auction-Rate Securities Put Option” below for additional information regarding the ARS put option. Because we have accepted the UBS offer, we have elected
to record a one-time transfer of our UBS ARS from available-for-sale to trading securities on our balance sheet. The transfer from available-for-sale to trading
securities on our balance sheet reflects management’s intent to exercise its ARS put option during the period June 30, 2010 to July 2, 2012. During the twelve
months ended December 31, 2009, we recorded a gain of $5.9 million to adjust the value of the UBS ARS to fair value which was offset by a loss of $5.9 million
on our ARS put option. We classified the UBS ARS and ARS put option in current assets in our consolidated balance sheet as of December 31, 2009 because the
ARS put option is now exercisable within one year. For the twelve months ended December 31, 2009 we had net realized gains/losses of zero. Further changes in
the value of the UBS ARS will also be recorded on our consolidated statement of operations in this manner.
Fair value for all ARS, including both the UBS securities classified as trading securities and the other ARS classified as available-for-sale, was based on a
discounted cash flow valuation that takes into account a number of factors including the WART of the underlying securities, the expected return, and the discount
rate. The actual WART from servicing reports was used where available. For securities where the actual WART was not available an estimate based on other
securities held was used. The expected return was calculated based on the last twelve months average for the 91-day U.S. treasury bill plus a spread. This rate is
the typical default rate for ARS held by us. The discount rate was calculated using the 3-month LIBOR rate plus adjustments for the security type. Changes in
any of the above estimates, especially the WART or the discount rate, could result in a material change to the fair value. At December 31, 2009, all ARS were
classified as Level 3 assets. Presently we have determined the decline in value for the available-for-sale ARS to be temporary because i) we have no intent
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Source: Support.com, Inc., 10-K, March 12, 2010 Powered by Morningstar® Document Research℠