LeapFrog 2005 Annual Report Download - page 86

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
Investments
Short-term investments consist primarily of auction rate preferred securities and certificates. Interest rates
on these securities reset at every auction date, generally every seven to ninety days, depending on the security or
certificate. Although original maturities of these instruments are generally longer than one year, the Company
has the right to sell these securities each auction date.
Long-term investments consist of municipal bonds with greater than one-year maturities. At December 31,
2005, the Company had no long-term investments. At December 31, 2004, the Company had long-term
investments totaling $3,737, which are included in “Other assets” in the balance sheet. These securities were sold
in 2005. The realized loss was $16.
The Company classifies all investments as available-for-sale. Available-for-sale securities are carried at
estimated fair value, based on available market information. There were no unrealized gains or losses for the
years ended 2005, 2004 and 2003. The cost of securities sold is based on the specific identification method.
Concentration of credit risk is managed by diversifying investments among a variety of high credit-quality
issuers.
Inventories
Inventories are stated at the lower of cost, on a first-in, first-out basis, or market value. The estimate of
allowances for slow-moving, excess and obsolete inventories is based on management’s review of on-hand
inventories compared to their estimated future usage, demand for products, anticipated product selling prices and
products planned for discontinuation. If actual future usage, demand for products and anticipated product selling
prices are less favorable than those projected by Company’s management, additional inventory write-downs may
be required. Management monitors these estimates on a quarterly basis. When considered necessary,
management makes additional adjustments to reduce inventory to its net realizable value, with corresponding
increases to cost of goods sold. Allowances for excess and obsolete inventory totaled $24,153 and $17,354 as of
December 31, 2005 and 2004, respectively, and are recorded as reductions of gross inventories.
Valuation of work-in-process inventory is an estimation of the Company’s liability for products in
production at the end of each fiscal period. This estimation is based upon normal production lead-times for
products the Company has scheduled to receive in subsequent periods, plus a valuation of products it specifically
knows are either completed or delayed in production beyond the normal lead-time flow. To the extent that actual
work-in-process differs from the Company’s estimates, inventory and accounts payable may need to be adjusted.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated
using the straight-line method over the estimated useful life of the assets, generally two to five years, except for
leasehold improvements, which are depreciated over the shorter of the estimated related useful life of the asset or
the remaining term of the lease. Amortization of equipment under capital leases is included in depreciation expense.
Included in property and equipment are manufacturing tools used to produce the Company’s products.
These tools are generally depreciated over two years on a straight-line basis. The Company periodically reviews
its capitalized manufacturing tools to ensure that the related product line is still in production and that the
estimated useful lives of the manufacturing tools are consistent with the Company’s depreciation policy.
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