LeapFrog 2006 Annual Report Download - page 101

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
20. Commitments and Contingencies
The Company leases office and warehouse space under noncancelable operating leases having initial terms
in excess of one year and expiring in various years between 2006 and 2016. The Company also has several
noncancelable office equipment leases with initial terms in excess of one year and which expire in various years
between 2006 and 2007, and certain of these leases contain rent escalation clauses. Generally, these have initial
lease periods of three to ten years, and contain provisions for renewal options of five years at market rates.
Rent expense for the years ended December 31, 2006, 2005 and 2004 was $3,722, $3,707 and $5,088,
respectively. Future minimum annual payments under the Company’s lease and royalty commitments for the
years ended December 31, are:
Commitments
Year Lease Royalty
2007 ..................................................... $ 8,014 $1,239
2008 ..................................................... 6,734 126
2009 ..................................................... 6,261 3
2010 ..................................................... 5,779 3
2011 ..................................................... 3,260 4
Thereafter ................................................ 14,266 —
Total .................................................... $44,314 $1,375
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,
2006 and 2005, the Company recorded a deferred rent liability of $1,827 and $1,449, 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 sheets.
Legal Proceedings
From time to time, LeapFrog is party to various pending claims and lawsuits. The Company is currently
party to the lawsuits described below, and it intends to defend or pursue these suits vigorously.
Tinkers & Chance v. LeapFrog Enterprises, Inc.
In August 2005, a complaint was filed against the Company in the federal district court for the Eastern
District of Texas by Tinkers & Chance, a Texas partnership. The complaint 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. In the spring of 2006,
the court granted Tinkers & Chance’s motions to amend the complaint to add claims of infringement of U.S.
Patent Nos. 7,006,786; 7,018,213; 7,029,283 and 7,050,754 against the Company’s LeapPad, Leapster and
L-Max platforms. A claim construction hearing is set for May 10, 2007 and trial is scheduled for November
2007. 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.
F-29