Support.com 2008 Annual Report Download - page 48

Table of Contents
unprecedented failure of the entire auction-rate securities market and the various legal settlements taking place to return principal to investors, including the UBS
rights offer, we have elected a one-time transfer of our UBS auction-rate securities from available-for-sale to trading securities in accordance with FASB
Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). The transfer to trading securities reflects management’s
intent to exercise its put option during the period June 30, 2010 to July 3, 2012. We recorded a realized loss of $7.1 million, in interest income and other, net, in
our consolidated statement of operations upon electing this one-time transfer of our $20.9 million of auction-rate securities to trading. The impact to our
Statement of Operations was offset by the value of the rights offer as of December 31, 2008 of $7.1 million. We will continue to mark the UBS auction-rate
securities to market each reporting period, with changes in value being recorded in interest income and other, net.
The fair value of our auction-rate securities at December 31, 2008 reflects an unrealized loss of $1.6 million, entirely related to securities classified as
available-for-sale. Fair value for all auction-rate securities was based on a discounted cash flow valuation that takes into account a number of factors including
the weighted average remaining term (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 T-bill plus a spread. This rate is the typical default rate for auction rate securities. The discount
rate was calculated using the 3-month LIBOR rate plus adjustments for the security type and the current lack of liquidity. Changes in any of the above estimates,
especially the weighted average remaining term or the discount rate, could result in a material change to the fair value. At December 31, 2008, all auction-rate
securities were classified as Level 3 assets in accordance with the Statement of Financial Accounting Standards (SFAS) No. 157 hierarchy. Presently we have
determined the decline in value for the available-for-sale auction-rate securities to be temporary because i) we have the intent and ability to hold these securities
in the near term in order to recoup their par values; ii) through December 31, 2008 all of the securities have maintained their AAA credit ratings; iii) loans made
by the issuers are backed by the federal government; and iv) we have noted no deterioration in the credit quality of the issuers.
However if circumstances change, we may be required to record an other-than-temporary impairment charge on the available-for-sale auction-rate
securities. We may similarly be required to record other-than-temporary impairment charges if the ratings on any of these securities are reduced or if any of the
issuers default on their obligations. In addition to impairment charges, any of these events could cause us to lose part or all of our investment in these securities.
Any of these events could materially affect our results of operations and our financial condition. We currently believe these securities are not significantly
impaired for the reasons described above; however, it could take until the final maturity of the underlying notes (up to 30 years) to realize our investments’
recorded value.
Impact of Foreign Currency Rate Changes
The functional currencies of our international operating subsidiaries are the local currencies. We translate the assets and liabilities of our foreign
subsidiaries at the exchange rates in effect on the balance sheet date. We translate their cost–plus income and expenses at the average rates of exchange in effect
during the period. We include translation gains and losses in the stockholders’ equity section of our balance sheet. We include net gains and losses resulting from
foreign exchange transactions in interest income and other in our statements of operations. Since we translate foreign currencies (primarily Canadian dollars,
British pounds, European Union euros and Indian rupees) into U.S dollars for financial reporting purposes, currency fluctuations can have an impact on our
financial results. We have both revenues and expenses that are denominated in foreign currencies. Historically, foreign currency expenses have been larger than
foreign currency revenues. A weaker US dollar environment would have a negative impact to our Income Statement, while a stronger US dollar environment
would have a positive impact on our Income Statement. The historical impact of currency fluctuations has generally been immaterial. Although the impact of
currency fluctuations on our financial results has generally been immaterial, there can be no guarantee that the impact of currency fluctuations will not be
material in the future. As of December 31, 2008 we did not engage in foreign currency hedging activities.
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Source: SUPPORTSOFT INC, 10-K, March 11, 2009