LeapFrog 2012 Annual Report Download - page 61

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
earnings beyond 2013, at a more-likely-than-not level of certainty, to support an assertion that its domestic
operations will generate sufficient taxable income to realize all of its deferred tax assets. Accordingly, based
on projected future earnings, a portion of the Company’s deferred tax valuation allowance was released and
recorded as an income tax benefit for the year. Also in 2012, the Company determined, at the required
more-likely-than-not level of certainty, that its subsidiary in Mexico will not generate sufficient future taxable
income to realize the benefit of its deferred tax assets. Accordingly, a non-cash valuation allowance was
recorded against the deferred tax assets of its subsidiary in Mexico. As such, a net valuation allowance release
of $20,340 was recorded in the current year. As of December 31, 2012, the Company has maintained a
valuation allowance of $70,385 against its deferred tax assets related to various federal, state and foreign net
operating loss carryforwards, tax credits, and loss carryforwards that are capital in nature. The Company will
continue to evaluate all evidence in future periods to determine if further release of its valuation allowance
is warranted.
The majority of the Company’s domestic deferred tax assets generally have 10 to 20 years until expiration or
indefinite lives. As of December 31, 2012, the Company had federal net operating loss carryforwards of
$140,436 which will expire between 2024 through 2029. State net operating loss carryforwards totaled
$178,504 as of December 31, 2012 and will expire in years 2013 through 2029. Section 382 of the Internal
Revenue Code limits net operating loss carryforwards when an ownership change of more than fifty percent of
the value of the stock in a loss corporation occurs within a three-year period. Sales of the Company’s
common stock could, under some circumstances, result in the occurrence of such a change in control and a
limitation on the Company’s future ability to use these carryforwards. The Company had $7,996 of cumulative
excess tax benefits from stock option deductions generated subsequent to the adoption of the authoritative
guidance regarding stock-based compensation, which are not included in the net operating loss carryforward
amounts above since they have not met the required realization criteria. The Company considers stock option
deduction benefits in excess of book compensation charges realized when it obtains an incremental benefit
determined by the ‘‘with and without’’ calculation method, under which excess tax benefits related to
stock-based compensation are not deemed to be realized until after the utilization of all other tax benefits
available to the Company. When realized, these benefits will increase additional paid-in capital.
As of December 31, 2012, the Company also had federal and California research and development credit
carryforwards of $3,992 and $8,194, respectively. The federal research carryforwards will begin to expire in
2023, while the California research credits can be carried forward indefinitely. In addition, the Company has
$3,667 in federal foreign tax credits that will begin expiring in 2017.
The changes in the balance of gross unrecognized tax benefits, during the years ended December 31, 2012,
2011 and 2010 were as follows:
Years Ended December 31,
2012 2011 2010
Balance at beginning of year ................... $19,493 $21,608 $22,080
Gross increase − tax positions taken during a prior
period ................................ 107 65 310
Gross decrease − tax positions taken during a prior
period ................................ (41) (223) (996)
Increases due to tax positions taken during the current
period ................................ — — 440
Decreases in the unrecognized tax benefits relating to
statute of limitations expiration ............... (4,367) (1,957) (226)
Balance at end of year .................... $15,192 $19,493 $21,608
Of the gross unrecognized tax benefits at December 31, 2012, 2011 and 2010, $819, $5,187 and $7,226,
respectively, are foreign tax positions and would affect the Company’s effective tax rate if recognized.
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