LeapFrog 2009 Annual Report Download - page 68

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
and Peso. The Company’s outstanding foreign exchange forward contracts, all with maturities of
approximately one month, had notional values of $13,277, and $21,890 at December 31, 2009 and 2008,
respectively. The fair market values of these instruments as of the same periods were $160 and $540,
respectively. The fair value of these contracts was recorded in prepaid expenses and other current assets
for all periods presented.
• Level 3 includes financial instruments for which fair value is derived from valuation techniques,
including pricing models and discounted cash flow models, in which one or more significant inputs are
unobservable, including the Company’s own assumptions. The Company’s Level 3 assets consist of
investments in auction rate securities (ARS). Historically, liquidity for ARS was provided via an auction
process that reset the applicable interest rate generally every 28 days, allowing investors to either roll
over their investments or sell them at par. As a result of liquidity issues in the global credit and capital
markets, auctions for all of the Company’s ARS began failing in the fourth quarter of 2007, when sell
orders exceeded buy orders. Currently, there is no active market for these securities; therefore, they do
not have readily determinable market values. The Company has engaged a third-party valuation firm to
estimate the fair value of the ARS investments using a discounted cash flow approach, which was
corroborated by a separate and comparable discounted cash flow analysis prepared internally. Based on
this valuation, the ARS investments were valued at $3,685 at December 31, 2009, which represents an
overall decline in value of $8,315 from par. The assumptions used in preparing the discounted cash flow
model are based on data available as of December 31, 2009 and include estimates of interest rates,
timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the
ARS. Given the current market environment, these assumptions are volatile and subject to change, and
therefore could result in significant changes to the estimated fair value of the ARS. Contractual maturity
for the Company’s ARS investments ranges from 2025 to 2050.
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value
on a recurring basis as of December 31, 2009 and 2008:
Estimated Fair Value Measurements
Carrying Value
Quoted Prices in
Active Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31, 2009:
Financial Assets:
Money market funds ................... $42,801 $42,801 $— $ —
Long-term investments ................. 3,685 — — 3,685
Forward currency contracts ............. 160 — 160 —
Total financial assets .................. $46,646 $42,801 $160 $3,685
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
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