LeapFrog 2002 Annual Report Download - page 34

usage and demand for our products. If actual future usage and demand for our products are less favorable than
those projected by our management, additional inventory write-downs may be required.
Intangible Assets
Intangible assets, including excess purchase price over the cost of net assets acquired, arose from our
September 23, 1997 acquisition of substantially all the assets and business of our predecessor, LeapFrog RBT,
and our acquisition of substantially all the assets of Explore Technologies on July 22, 1998. At December 31,
2002, our intangible assets had a net balance of $23.2 million. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).
SFAS 142 requires the use of a nonamortization approach to account for goodwill and some other intangible
assets. We adopted the pronouncement effective January 1, 2002, and accordingly we no longer amortize
goodwill and other indefinite-lived intangible assets. As of December 31, 2002, we had $19.5 million, net, of
goodwill and other indefinite-lived intangible assets, which are no longer subject to amortization. At December
31, 2002, we tested our goodwill and other intangible assets for impairment based on a combination of the fair
value of the cash flows that the business can be expected to generate in the future, known as the income
approach, and the fair value of the business as compared to other similar publicly traded companies, known as
the market approach. Based on this assessment we determined that no adjustments were necessary to the stated
values.
Website Development, Content Development and Tooling Capitalization
Our management is required to use professional judgment in determining whether development costs meet
the criteria for immediate expense or capitalization. We have capitalized a portion of our website development
costs in accordance with Emerging Issues Task Force 00-02, “Accounting for Website Development Costs”
guidelines. We capitalized $0.3 million in 2002 compared with $3.1 million in 2001 related to website
development costs. We depreciate capitalized website development costs on a straight-line basis over two years.
The development work for our current website has been largely completed and we do not anticipate capitalizing
further website development costs.
We capitalize the prepublication costs of books as content development costs. Only costs incurred with
outside parties are capitalized. In 2002, we capitalized $3.6 million of content development costs, $3.1 million of
which pertained to our Education and Training segment. In 2001, we capitalized $5.0 million in content
development costs, $3.5 million of which pertained to our Education and Training segment. Prior to 2001, our
use of external developers of content was minimal. We depreciate these assets from the time of publication over
their estimated useful lives, estimated to be three years, using the sum of years digits method. If the related
content is deemed to have a shorter useful life, the remaining balance is written off when the content is no longer
used in production.
We capitalize costs related to manufacturing tools developed for our products. We capitalized $5.4 million
in 2002 compared with $2.6 million in 2001 related to manufacturing tools. We depreciate these assets on a
straight-line basis, in cost of sales, over an estimated useful life of two years. If the related product line or our
manufacturing production results in a shorter life than originally expected, we write off the remaining balance
when we remove the tool from production.
Stock-Based Compensation
We account for employee stock options using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation is
generally not recorded for options granted at fair value to employees and directors.
In connection with stock options granted to employees in August 2001, we recorded an aggregate of $3.3
million of deferred compensation in stockholders’ equity for the year ended December 31, 2001. These options
29