LeapFrog 2005 Annual Report Download - page 61

after December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on our
consolidated results of operations and financial condition.
In December 2004, the FASB issued SFAS 123R. SFAS 123R requires employee stock options and rights to
purchase shares under stock participation plans to be accounted for under the fair value method. Further, it
eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB 25,
and as allowed under the original provisions of SFAS 123. SFAS 123R requires the use of an option pricing
model for estimating fair value, which is amortized to expense over the service periods. SFAS 123R allows for
either prospective recognition of compensation expense or retrospective recognition, which may be back to the
original issuance of SFAS 123 or only to interim periods in the year of adoption. This statement also amends
SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reflected as financing cash
inflows rather than operating cash inflows. The adoption of SFAS 123R will change our accounting for employee
stock option grants. Our accounting for non-employee stock options, stock awards and restricted stock units is
unchanged. The adoption of SFAS 123R is estimated to result in a compensation charge for fiscal year 2006 of
approximately $1.7 million based on current stock options grants outstanding.
In November 2004, the FASB, issued SFAS No. 151, “Inventory Costs,” or SFAS 151. SFAS 151 clarifies
the accounting for unusual amounts of idle facility expense, freight handling costs and waste material (spoilage).
The statement requires that those items be recognized as current-period charges regardless of whether they meet
the criterion of “so abnormal.” In addition, the statement requires that allocation of fixed production overhead to
the costs of conversion be based on the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of
this standard to have any material impact on our results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We develop products in the United States and market our products primarily in North America and, to a
lesser extent, in Europe and the rest of the world. We are billed by and pay our third-party manufacturers in U.S.
dollars. Sales to our international customers are transacted primarily in the country’s local currency. As a result,
our financial results could be affected by factors such as changes in foreign currency rates or weak economic
conditions in foreign markets.
Beginning in the first quarter of 2004, we began managing our foreign currency transaction exposure by
entering into short-term forward contracts. The purpose of this hedging program was to minimize the foreign
currency exchange gain or loss reported in our financial statements. The net foreign currency exchange gain for
2005, 2004 and 2003 was approximately $0.1, $1.9 and $2.8 million, respectively.
Our foreign exchange forward contracts generally have original maturities of one month or less. A summary
of all foreign exchange forward contracts that were outstanding as of December 31, 2005 follows:
Currency
Average
Forward
Exchange
Rate
Notional
Amount
Fair
Value(1)
British Pound ....................................... 1.76200 10,342,212 $445,711
Euro .............................................. 1.20080 8,632,000 146,392
Canadian Dollar ..................................... 1.16240 31,302,434 (13,874)
Mexican Peso ...................................... 10.75850 73,812,000 (82,412)
Total ............................................. $495,817
(1) In U.S. dollars.
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