Support.com 2008 Annual Report Download - page 47

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investment risk. The value and liquidity of the securities in which we invest could deteriorate rapidly and the issuers of such securities could be subject to credit
rating downgrades. In light of the current market conditions and these additional risks, we actively monitor market conditions and developments specific to the
securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds. While we believe we take prudent
measures to mitigate investment related risks, such risks cannot be fully eliminated, as there are circumstances outside of our control.
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments
without significantly increasing risk. To achieve this objective, we invest our excess cash in a variety of securities, including government debt securities,
auction-rate securities, corporate notes and bonds, commercial paper and money market funds meeting certain criteria. These securities are classified as
available-for-sale, except for our UBS ARS holdings, which are classified as trading, as described below. Consequently, our available-for-sale securities are
recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss).
Our holdings of the securities of any one issuer, except government agencies, do not exceed 10% of our portfolio. We do not utilize derivative financial
instruments to manage our interest rate risks.
As of December 31, 2008, we held $23.6 million in investments (excluding cash and cash equivalents), which consisted primarily of government debt
securities, auction-rate securities, corporate notes and bonds, and commercial paper. The weighted average interest rate of our portfolio was approximately 2.33%
at December 31, 2008. 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 $236,000.
At December 31, 2008 and 2007 we had investments in AAA-rated auction-rate debt securities with various state student loan authorities with estimated
fair values aggregating $15.8 million and $38.9 million, respectively. The student loans made by these authorities are substantially guaranteed by the federal
government through the Federal Family Education Loan Program (FFELP). Auction-rate securities 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. Auction-rate securities 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 auction-rate security then pays a default interest rate. Following such a failed auction, we cannot
access our funds that are invested in the corresponding auction-rate securities 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, illiquidity conditions in the global credit markets resulted in failed auctions for all of our
auction-rate securities held. In the near term, our ability to liquidate our investments or fully recover the carrying values may be limited or not exist.
In August 2008, UBS, the broker-dealer for 85% of our auction-rate securities, announced a settlement under which it has offered to provide liquidity
solutions for, or purchase, the auction-rate securities held by its institutional clients. In October 2008, UBS extended an offer of rights to us to sell our eligible
auction-rate securities at par value back to UBS during the time period from June 30, 2010 through July 2, 2012. All of the auction-rate securities we hold with
UBS qualify as “eligible” for purposes of the rights offer. Under the offer, UBS will have sole discretion without prior notice to us, to sell eligible securities and
return par value to us through July 2, 2012. In November 2008, we elected to accept the offer of rights from UBS that gives us the option to sell UBS a total of
$20.9 million at par value at any time beginning June 30, 2010 through July 2, 2012. Upon acceptance of the UBS rights offer, we elected to value the put option
at fair value as allowed under SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” Refer to the Auction Rate Security Put
Option section in Note 1 to the Consolidated Financial Statements for more information. Given the
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Source: SUPPORTSOFT INC, 10-K, March 11, 2009