LeapFrog 2004 Annual Report Download - page 32

Content Development, Home Video Production and Tooling Capitalization
Our management is required to use its judgment in determining whether development costs meet the criteria
for immediate expense or capitalization.
We capitalize the prepublication costs of books as content development costs. Only costs incurred with
outside parties are capitalized. In 2004, we capitalized $2.0 million of content development costs, $0.4 million of
which pertained to our Education and Training segment. In 2003, we capitalized $1.7 million in content
development costs, $1.3 million of which pertained to our Education and Training segment. We amortize 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 over a shorter period of time or when the content is no longer used in production. In 2004 we wrote off $0.9
million in asset cost and $0.9 million in associated accumulated amortization. There were no write-offs in prior
periods.
We capitalize costs related to the production of home video in accordance with AICPA Statement of
Accounting Position No 00-2, “Accounting by Producers or Distributors of Film.” Video production costs are
amortized based on the ratio of the current period’s gross revenues to estimated remaining total gross revenues
from all sources on an individual production basis. In 2004, we capitalized $1.4 million and amortized $0.7
million of video production costs. In 2003, we capitalized $1.0 million and amortized $0.6 million of video
production costs. We had no video production cost in prior years. If the related video production costs are
deemed to have lower gross revenues than originally expected, the remaining balance is written off when the
revised revenues are earned.
Amortization of content development costs and video production are classified as “cost of sales” in our
Consolidated Statements of Operations.
We capitalize costs related to manufacturing tools developed for our products. We capitalized $6.6 million
in 2004 compared with $4.8 million in 2003 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. In 2004 we recorded accelerated depreciation of $0.8 million to write
off certain tooling that would not be used in 2005.
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,” or APB 25, 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
were considered compensatory because the deemed fair value of the underlying shares of Class A common stock
in August 2001, as subsequently determined, was greater than the exercise price of the options. In accordance
with APB 25, this deferred compensation will be amortized to expense through the second quarter of 2005 as the
options vest. As of December 31, 2004, $51,000 remained to be amortized to expense.
Stock-based compensation arrangements to non-employees are accounted for in accordance with SFAS 123,
“Accounting for Stock-Based Compensation,” and EITF No. 96-18, “Accounting for Equity Instruments that Are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” using a fair
value approach. The compensation costs of these arrangements are subject to re-measurement over the vesting
terms as earned.
25