LeapFrog 2005 Annual Report Download - page 105

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
The Company is also obligated to pay certain minimum royalties in connection with license agreements to
which the Company is a party.
The Company accounts for rent expense on a straight line basis over the term of the lease. At December 31,
2005 and 2004, the Company recorded deferred rent liability of $1,449 and $1,275, respectively, which primarily
related to rent escalation costs for its corporate headquarters in Emeryville, California. Deferred rent is included
in long-term liabilities in the accompanying balance sheet.
In January 2004, the Company entered into a ten-year technology license agreement with a foreign company
to jointly develop and customize their respective technologies to be combined in a platform and related licensed
products. The agreement called for contractual payments of $6,000 in license fees in 2004 and $8,500 in advance
royalties in 2005 and $2,500 in 2006. Additionally, the Company paid $1,000 of engineering fees subject to
attainment of specific milestones.
Legal Proceedings
Various claims and lawsuits are pending against the Company. The Company intends to defend or pursue
these suits vigorously.
Tinkers & Chance v. LeapFrog Enterprises, Inc.
On August 1, 2005, a complaint was filed against the Company in the eastern federal district court of Texas
by Tinkers & Chance, a Texas partnership. The compliant alleges that the Company has infringed, and induced
others to infringe, United States Patent No. 6,739,874 by making, selling and/or offering for sale in the United
States and/or importing the Company’s LeapPad and Leapster platforms and other unspecified products.
Tinkers & Chance seeks unspecified monetary damages, including triple damages based on its allegation of
willful and deliberate infringement, attorneys’ fees and injunctive relief. On September 23, 2005, the Company
filed a motion to transfer the case to the Northern District of California and further filed an action against
Tinkers & Chance in the Northern District of California seeking declaratory relief that the Company’s products
do not infringe United States Patent No. 6,739,874. On February 23, 2006, the federal district court in Texas
denied the Company’s motion to transfer. On February 28, 2006, Tinkers & Chance filed a motion to amend the
original complaint to add a claim that the Company is infringing United States Patent No. 7,006,786. Discovery
has not commenced and no trial date has been set. The Company has not accrued any amount related to this
matter because it is not probable that a liability has been incurred and the amount of liability, if any, is not
currently estimable.
LeapFrog Enterprises, Inc. v. Fisher-Price, Inc. and Mattel, Inc.
In October 2003, the Company filed a complaint in the federal district court of Delaware against Fisher-
Price, Inc., No. 03-927 GMS, alleging that the Fisher-Price PowerTouch learning system violates United States
Patent No. 5,813,861. In September 2004, Mattel, Inc. was joined as a defendant. The Company is seeking
damages and injunctive relief. Trial by jury began on May 16, 2005. On May 27, 2005, the district court declared
a mistrial because the jury was unable to reach a unanimous verdict, and the parties stipulated to have the case
decided by the court based on the seven-day trial record. The parties completed post-trial briefing in August
2005. The parties are awaiting a verdict by the court.
LeapFrog Enterprises, Inc. v. Lexington Insurance Co.
On October 21, 2004, the Company filed a complaint in the Superior Court of the State of California,
County of Alameda, against Lexington Insurance Co., No. RG04181463, alleging breach of contract and bad
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