THQ 2010 Annual Report Download - page 67

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The following table summarizes our financial assets measured at fair value on a recurring basis as of
March 31, 2009 (in thousands):
Level 1
Level 2
Level 3
Total
Cash Equivalents:
Money market funds....................................
.
$38,234 $— $— $38,234
Short-term investments:
Municipal securities......................................
.
— 6,399 — 6,399
Corporate securities.....................................
.
1,343 1,062 — 2,405
Long-term investments:
Municipal securities......................................
.
— — 31,102 31,102
Put option .....................................................
.
— — 4,541 4,541
Investment in Yuke’s ...................................
.
3,847 — — 3,847
Total
..........................................................
.
$43,424 $7,461 $35,643 $86,528
Level 3 assets primarily consist of ARS, the majority of which are AAA/Aaa rated and collateralized by
student loans guaranteed by the U.S. government under the Federal Family Education Loan Program and
backed by monoline bond insurance companies. Substantially all of the remaining ARS are also backed by
monoline bond insurance companies. We historically invested in these securities as part of our cash
management program. However, the lack of liquidity in these credit markets has prevented us and other
investors from selling these securities. As such, $1.9 million of these investments, not subject to the UBS
Agreement, are classified as long-term at March 31, 2010 to reflect the lack of liquidity. We believe we have
the ability to, and intend to, hold these ARS classified as available-for-sale until the auction process recovers
or the securities mature. All of the securities are investment grade securities, and we have no reason to
believe that any of the underlying issuers of these ARS are presently at risk or that the underlying credit
quality of the assets backing these ARS has been impacted by the reduced liquidity of these investments.
We have continued to receive interest payments on these ARS according to their terms.
We have estimated the fair value of these ARS using a discounted cash flow analysis that considered the
following key inputs: i) credit quality, ii) estimates on the probability of the issue being called or sold prior to
final maturity, iii) current market rates, and iv) estimates of the next time the security is expected to have a
successful auction. The contractual terms of these securities do not permit the issuer to call, prepay or
otherwise settle the securities at prices less than the stated par value of the security.
We have elected fair value accounting for the put option recorded in connection with the UBS Agreement,
discussed in “Note 3—Investment Securities.” This election was made in order to mitigate volatility in earnings
caused by accounting for the put option and underlying ARS under different methods. We have estimated
the value of the put option as the difference between the par value of the underlying ARS and the fair value
of the ARS, after applying an estimated risk discount, as the put option gives us the right to sell the
underlying ARS to the broker during the period June 30, 2010 to July 2, 2012 for a price equal to the par
value.
The following table provides a summary of changes in fair value of our Level 3 financial assets in fiscal 2009
and 2010 (in thousands):
Level 3
Fair Value
Measurements
Balance at March 31, 2008 .................................................................... $54,419
Total gains or (losses) (realized/unrealized):
Included in earnings............................................................................. (4,554)
Included in accumulated other comprehensive income.................. 1,033
Purchases, sales, issuances and settlements, net ............................. (11,120)
Transfers out of Level 3........................................................................... (4,135)
Balance at March 31, 2009 .................................................................... $35,643
Total gains or (losses) (realized/unrealized):
Included in earnings............................................................................. 156
Included in accumulated other comprehensive income.................. 117
Purchases, sales, issuances and settlements, net ............................. (8,880)
Transfers out of Level 3........................................................................... (2,411)
Balance at March 31, 2010
................................................................ $
$24,625