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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
3. Fair Value of Financial Instruments
The carrying values and estimated fair values of the Company’s financial instruments, which include short-
term money market funds, foreign exchange forward contracts and long-term investments in auction rate
securities (“ARS”) are presented in the table below for the periods ended December 31, 2008 and 2007.
Carrying
Value
Estimated Fair Value Measurements
Quoted
Prices in
Active
Markets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1) (Level 2) (Level 3)
December 31, 2008:
Financial Assets:
Money market funds ............................ $53,502 $53,502 $— $ —
Forward currency contracts ...................... 540 — 540 —
Long-term investments .......................... 4,962 — — 4,962
Total financial assets ............................ $59,004 $53,502 $540 $ 4,962
December 31, 2007:
Financial Assets:
Money market funds ............................ $53,151 $53,151 $— $ —
Long-term investments .......................... 10,925 — — 10,925
Total financial assets ............................ $64,076 $53,151 $— $10,925
Financial Liabilities:
Forward currency contracts ...................... $ 192 $ — $192 $ —
In accordance with SFAS No. 157, in measuring fair value, the Company applies a fair value hierarchy
based on three levels of inputs, of which the first two are considered observable and the last unobservable. The
three levels are as follows:
• Level 1 assets comprise cash and money market funds with original maturities of three months or less.
Level 1 assets are considered highly liquid and are stated at cost, which approximates market value.
• Level 2 assets and/or liabilities comprise outstanding foreign exchange forward contracts which the
Company uses to hedge its exposure to certain foreign currencies, including the British Pound, Canadian
Dollar, Euro and Mexican Peso. The Company’s outstanding foreign exchange forward contracts, all
with maturities of approximately one month, had notional values of $21,890 and $34,785 at
December 31, 2008 and 2007, respectively. The fair market values of these instruments at December 31,
2008 and 2007 were $540 and $(192), respectively. At December 31, 2008 and 2007, the fair value of
these contracts was recorded in prepaid expenses and other current assets and in accrued liabilities and
deferred revenue, respectively.
• Level 3 assets consist of the Company’s investment in ARS. The uncertainties in the credit and financial
markets regarding these securities since the fourth quarter of 2007 have prevented the Company from
liquidating its holdings of ARS in auctions of these securities held throughout 2008, as the amount of
securities submitted for sale exceeded the amount of purchase orders. As there has been no market for
these securities since the fourth quarter of 2007, they have been classified as Level 3 assets. At
December 31, 2008 and 2007, the Company used various significant unobservable inputs, including its
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