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Table of Contents
principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value, which are the following:
• Level 1—Quoted prices in active markets for identical assets or liabilities. Therefore, determining fair value for Level 1 instruments generally does
not require significant management judgment, and the estimation is not difficult.
• Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.
Level 3 assets consist of auction-rate debt securities with various state student loan authorities and the auction-rate securities put option. Beginning in
February 2008 and through March 2009, all auctions for these securities have failed. Based on the continued failure of these auctions and the underlying
maturities of the securities, we have classified auction-rate securities as long-term assets on our 2008 balance sheet. The fair value of the auction-rate securities
and the related put option as of December 31, 2008 was estimated by management.
Fair Value Estimates
In November, 2008, we signed a Rights Agreement with UBS concerning the disposition of its Auction Rate Securities (ARS). The UBS agreement gives
us the right to sell our ARS holdings back to UBS, at par value, beginning June 30, 2010 through July 2, 2012. Prior to June 30, 2010, UBS and we have the right
to sell our ARS holdings at any time; should UBS sell the holdings, UBS must return par value to us. The rights represent a freestanding financial instrument for
accounting purposes. As noted above, we elected to value this “put” option at fair value as allowed under SFAS No. 159. We recognized the value of the
repurchase right as an asset with the corresponding gain recorded in earnings. Fair value was determined using a “with and without” approach, based on a
discounted cash flow valuation comparing the value of the auction-rate securities with the put option and without it. We took into account the same factors as
those used to value the auction rate securities noted above. The value of the rights offer was recorded in interest income and expense, net. As of December 31,
2008, the value of the rights offer was $7.1 million, which off-set the realized loss recorded on the related auction-rate securities in our Statement of Operations.
Our auction-rate securities continue to be presented as long-term investment on our Balance Sheet, while the value of the rights agreement is presented
separately as auction-rate securities put option. At December 31, 2008, the value of the auction-rate securities and the auction-rate securities put option was
18.5% of our total assets. This ARS Put Option is not a traditional put option in that it is non-transferable, non-assignable, and not available for trade in any
financial market.
We have made certain estimates in calculating the fair value of the ARS Put Option for our UBS securities, including estimates for the weighted average
remaining term (WART) of the underlying securities in which actual WART from servicing reports was unavailable, the expected return, and the discount rate. If
our estimates for these assumptions change, the fair value estimate of our ARS holdings as well as the fair value estimate of our ARS Put Option would change,
which would impact our operating results.
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Source: SUPPORTSOFT INC, 10-K, March 11, 2009