LeapFrog 2006 Annual Report Download - page 82

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
projected by 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 were $34,103 and $24,153 in 2006 and 2005, respectively, and are recorded as a reduction
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.
Depreciation expense for manufacturing tools is included in cost of goods sold. During the years ended
December 31, 2006, 2005, and 2004, the Company recorded accelerated depreciation of $94, $559, and $785,
respectively to write-off certain tooling that will not be used in future periods.
The Company capitalizes website development costs in accordance with Emerging Issues Task Force
(“EITF”) No. 00-02, “Accounting for Website Development Costs.” The costs capitalized include those to
develop or acquire and customize code for web applications, costs to develop HTML web pages or develop
templates and costs to create initial graphics for the website that included the design or layout of each page.
These costs are amortized on a straight-line basis over two years. In the years ended December 31, 2006 and
2005, the Company capitalized $859 and $1,167, respectively, and amortized $1,046 and $653, respectively, of
website development costs.
Intangible Assets
Intangible assets include the excess of purchase price over the cost of net assets acquired (Goodwill).
Goodwill arose from its September 23, 1997 acquisition of substantially all the assets and business of the
Company’s predecessor, LeapFrog RBT, and its acquisition of substantially all the assets of Explore
Technologies on July 22, 1998 and is allocated to the U.S. Consumer segment. Pursuant to the Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill is
tested for impairment at least annually. The Company determined no adjustments to the stated value of goodwill
were necessary.
Intangible assets with other than indefinite lives include patents, trademarks and licenses, and are amortized
on a straight-line basis over their estimated useful lives, ranging from 3 to 15 years. At December 31, 2006, the
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