LeapFrog 2011 Annual Report Download - page 72

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
Income tax expense for the years ended December 31, 2011, 2010 and 2009 included interest and penalties of
$446, $285 and $926, respectively. As of December 31, 2011, 2010 and 2009, the Company had
approximately $2,373, $2,898 and $2,648, respectively, of accrued interest and penalties related to uncertain
tax positions.
The Company is subject to examination for tax years 2000 and forward. The Company believes it is
reasonably possible that the total amount of unrecognized tax benefits in the future could decrease by up to
$4,448, excluding potential interest and penalties, related to its foreign operations over the course of the next
twelve months due to expiring statutes of limitations, which could be recognized as a tax benefit and affect
the effective tax rate.
Open and Resolved Tax Matters
The Company files income tax returns in the U.S. federal, various state and foreign jurisdictions. The
Company has substantially concluded all U.S. federal and state income tax matters through 1999.
The state of California has notified the Company of a pending examination related to its research and
development credits claimed for the tax years 2002 and 2003; however, the Company has not been notified
when the audit will commence. In 2010, the state of Illinois notified the Company of an income tax audit for
the 2006 and 2007 tax year. This audit concluded in 2011 with no material effect. In 2011, the Company was
notified by the Mexico taxing authority of an income tax audit for the 2009 tax year. Also in 2011, the
Government of Ontario, Canada notified the Company of an income tax examination for the 2007 and 2008
tax years. The outcomes of these foreign audits are not yet determinable.
With respect to the open matters, the outcomes are not yet determinable. However, management does not
anticipate that any adjustments would result in a material change to the Company’s results of operations,
financial conditions or liquidity.
11. Borrowings Under Credit Agreements
On August 13, 2009, the Company, certain financial institutions and Bank of America, N.A., entered into an
amended and restated loan and security agreement for a $75,000 asset-based revolving credit facility (the
‘‘revolving credit facility’’). The Company has granted a security interest in substantially all of its assets to
the lenders as security for its obligations under the revolving credit facility. Provided there is no default under
the revolving credit facility, the Company may elect, without the consent of any of the lenders, to increase the
size of the revolving credit facility under the loan agreement up to an aggregate of $150,000.
The borrowing availability varies according to the levels of the Company’s accounts receivable and cash and
investment securities deposited in secured accounts with the lenders. Subject to the level of this borrowing
base, the Company may make and repay borrowings from time to time until the maturity of the facility. The
interest rate is, at the Company’s election, Bank of America, N.A.’s prime rate (or base rate) or a LIBOR rate
defined in the loan agreement, plus, in each case, an applicable margin. The applicable margin for a loan
depends on the average daily availability for the most recent fiscal quarter and the type of loan. Borrowing
availability under the revolving credit facility was $75,000 as of December 31, 2011.
The revolving credit facility contains customary events of default. If any event of default under the revolving
credit facility occurs, the lenders may terminate their respective commitments, declare immediately due all
borrowings under the revolving credit facility and foreclose on the collateral. A cross-default provision applies
if a default occurs on other indebtedness in excess of $5,000 and the applicable grace period in respect of the
indebtedness has expired, such that the lender of, or trustee for, the defaulted indebtedness has the right to
accelerate. The Company is also required to maintain a ratio of Earnings Before Interest, Taxes, Depreciation
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