LeapFrog 2007 Annual Report Download - page 88

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
Adjustments to fair value of available-for-sale securities that are considered to be temporary are recorded as a
component of other comprehensive income. A decline in the fair value of investment securities below cost, that is
deemed to be other than temporary, results in a reduction in the carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
At December 31, 2007, the Company had investments available-for-sale with a carrying value of $10,925.
These investments were non mortgage-backed auction rate securities (“ARS”). Auction rate securities are
generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the
applicable interest rate at pre-determined calendar intervals, in the case of these particular securities, every
28 days. This mechanism normally allows existing investors to rollover their holdings and continue to own their
respective securities or liquidate their holdings by selling their securities at par.
The recent uncertainties in the credit markets have prevented the Company and other investors from
liquidating the holdings of auction rate securities in recent auctions for these securities because the amount of
securities submitted for sale has exceeded the amount of purchase orders. Accordingly, the Company still holds
these auction rate securities and is receiving interest at a higher rate than similar securities for which auctions
have cleared. These investments are insured against loss of principal and interest and have credit ratings of AAA
to AA-. The Company is uncertain as to when the liquidity issues relating to these investments will improve. As a
result of the failed auctions and the continued uncertainty of when the liquidity issues will improve, the Company
recorded a $2,476 other-than-temporary impairment charge on $6,000 of original cost ARS and a $598 temporary
impairment charge on $8,000 of original cost ARS to reduce the value of the total investment in ARS to its
estimated fair value of $10,925.
The carrying value of the Company’s investments in ARS as of December 31, 2007 represents the
Company’s best estimate of the fair value of these investments based on currently available information. The
Company evaluated the estimated fair value at January 31, 2008 and concluded the further devaluations of the
investment in ARS at that date was indicative of circumstances that existed at the balance sheet date. As a result,
the further decline in value at January 31, 2008 was recorded as of December 31, 2007.
The estimation process included consideration of such factors as issuer and insurer credit rating, comparable
market data, if available, credit enhancement structures, projected yields, discount rates and terminal periods.
Due to the uncertainty in the credit markets, it is reasonably possible the fair value of these investments may
change in the near term. If the credit markets recover and successful auctions resume, the Company may be able
to recover an amount greater than the carrying value of the ARS as of December 31, 2007, which would result in
a gain. However, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate,
the Company may be required to further adjust the carrying value of its investment in ARS through additional
impairment charges. An estimate of these future losses or gains cannot be made by the Company at this time.
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