Support.com 2008 Annual Report Download - page 59

Table of Contents
SUPPORTSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 the Company, to sell our eligible
securities and return par value to the Company up 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 below for further discussion. Given the 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 par value of auction-rate securities to trading. This 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 held by us.
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, “Fair Value
Measurements” 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.
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Source: SUPPORTSOFT INC, 10-K, March 11, 2009