LeapFrog 2012 Annual Report Download - page 41

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and the expected term of the awards. Stock-based compensation expense may be significantly affected by
changes in our stock price, our actual forfeiture rates and the extent of future grants of equity awards. If
actual results differ significantly from our estimates, stock-based compensation expense and our results of
operations could be materially affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the U.S. 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 U.S. dollars
(‘‘USD’’). Sales to our international customers are transacted primarily in the country’s local currency. As a
result, our financial results could 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, but the program, when properly executed, may not always eliminate our exposure to
movements of currency exchange rates. The results of our hedging program for the fiscal years ended
December 31, 2012, 2011 and 2010 are summarized in the table below:
Years Ended December 31,
2012 2011 2010
(Dollars in thousands)
Losses on foreign exchange forward contracts ............ $(2,232) $(2,004)* $(204)
Gains (losses) on underlying transactions denominated in
foreign currency ............................... 666 (1,644) (146)
Net losses ................................... $(1,566) $(3,648) $(350)
* Amount includes a $1.5 million realized loss on foreign exchange forward hedging contracts in our U.S.
segment due to an operational error.
Our foreign exchange forward contracts generally have original maturities of one month or less. A summary
of all foreign exchange forward contracts outstanding as of December 31, 2012 and 2011 is as follows:
2012 2011
Average
Forward
Exchange
Rate
Notional
Amount in
Local
Currency
(1)
Fair Value of
Instruments
in USD
(2)
Average
Forward
Exchange
Rate
Notional
Amount in
Local
Currency
(1)
Fair Value of
Instruments
in USD
(2)
Currencies:
British Pound (GBP/USD) .... 1.608 22,684 $(296) 1.552 9,795 $ 6
Euro (Euro/USD) .......... 1.322 7,239 16 1.318 1,940 42
Canadian Dollar (USD/CAD) . . 0.992 7,087 24 1.022 3,202 (9)
Mexican Peso (USD/MXN) . . . 13.070 4,925 1 13.933 5,665 1
Total fair value of instruments
in USD ................. $(255) $40
(1) In thousands of local currency
(2) In thousands of USD
Cash equivalents and long-term investments are presented at fair value on our balance sheet. We invest our
excess cash in accordance with our investment policy. Any adverse changes in interest rates or securities
prices may decrease the value of our investments and operating results. As of December 31, 2012 and 2011,
our excess cash was invested only in money market funds.
33