LeapFrog 2008 Annual Report Download - page 50

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products primarily in North America and, to a
lesser extent, in Europe and the rest of the world. We are billed by and pay our third-party manufacturers in
United States dollars (“USD”). Sales to our international customers are transacted primarily in the country’s local
currency. As a result, our financial results have been and are expected to continue to be affected by factors such
as changes in foreign currency rates or weak economic conditions in foreign markets.
We manage our foreign currency transaction exposure by entering into short-term forward contracts. The
purpose of this hedging program is to minimize the foreign currency exchange gain or loss reported in our
financial statements. The table below shows the results of our hedging program for the fiscal years ended
December 31, 2008, 2007 and 2006.
Years Ending December 31,
2008 2007 2006
Gains (losses) on foreign currency forward contracts ........................ $ 874 $(2,967) $(3,872)
Gains (losses) on underlying transactions denominated in foreign currency ...... (2,092) 2,964 2,812
Net losses ...................................................... $(1,218) $ (3) $(1,060)
Our foreign exchange forward contracts generally have original maturities of one month or less. A summary
of all foreign exchange forward contracts that were outstanding as of December 31, 2008 and 2007 follows:
2008 2007
Average
Forward
Exchange
Rate per $1
Notional
Amount in
Local
Currency (1)
Fair
Value of
Instruments
in USD (2)
Average
Forward
Exchange
Rate per $1
Notional
Amount in
Local
Currency (1)
Fair
Value of
Instruments
in USD (2)
Currencies:
British Pound (USD/GBP) . . . 1.435 4,238 $ 55 2.008 645 $ (17)
Euro (USD/Euro) .......... 1.388 6,381 303 1.441 8,144 (152)
Canadian Dollar (C$/USD) . . . 1.236 4,476 72 0.998 5,512 (57)
Mexican Peso (MXP/USD) . . . 13.960 33,409 110 10.919 177,421 34
Total fair value of
instruments in
USD ............... $540 $(192)
(1) In thousands of local currency
(2) In thousands of USD
Cash and cash equivalents are presented at fair value on our balance sheet. We invest our excess cash in
accordance with our investment policy. At December 31, 2008 and 2007 our cash was invested primarily in high-
grade U.S. government obligations and money market funds.
LeapFrog experiences interest rate risk and impairment risk only on its long-term investment in auction rate
securities, as we have no long-term borrowings. Due to the financial market collapse that commenced in the
fourth quarter of 2007, we have incurred a total of $9.0 million in unrealized impairment losses on our auction
rate securities, which have been recognized as losses in the statements of operations in 2007 and 2008. We
evaluate this investment on a quarterly basis and will continue to recognize impairment losses in the statements
of operations if and when they occur.
40