LeapFrog 2007 Annual Report Download - page 104

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
19. Commitments and Contingencies
Leases and Royalties
LeapFrog leases a portion of its capital equipment and certain of its facilities under operating leases that
expire at various dates through 2016.
Rent expense was $4,591 in 2007, $3,722 in 2006 and $3,707 in 2005. The Company is also obligated to
pay certain minimum royalties in connection with license agreements to which the Company is a party.
Minimum rent commitments under all non-cancelable leases with an initial term in excess of one year and
minimum royalty commitments are set forth in the following table:
Commitments
Year Lease Royalty
2008 ....................................................................... $ 8,163 $ 950
2009 ....................................................................... 7,821 1,350
2010 ....................................................................... 7,010 434
2011 ....................................................................... 3,965 250
2012 ....................................................................... 3,823 —
Thereafter .................................................................. 12,390 —
Total ...................................................................... $43,172 $2,984
LeapFrog accounts for rent expense on a straight-line basis over the term of the lease. At December 31,
2007 and 2006 the Company recorded a deferred rent liability of $2,114 and $1,827, respectively, relating to rent
escalation costs net of tenant incentives for its Emeryville, California headquarters. Deferred rent is included in
long-term liabilities. An additional $26 was recorded as a short-term lease obligation, compared to $579 in 2006.
Legal Proceedings
Tinkers & Chance v. LeapFrog Enterprises, Inc.
In August 2005, Tinkers & Chance, a Texas partnership, filed a complaint against LeapFrog in the federal
district court for the Eastern District of Texas. The complaint alleged that the Company 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, its LeapPad and Leapster platforms, and other unspecified products. 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, My First
LeapPad, Leapster and Leapster L-MAX platforms. Tinkers & Chance sought an aggregate of approximately $41
million in monetary damages, as well as interest, triple damages based on its allegation of willful and deliberate
infringement, attorneys’ fees and injunctive relief.
In November 2007, the Company entered into an agreement with Tinkers & Chance under which the
Company paid to Tinkers & Chance $7.5 million and Tinkers & Chance agreed to grant to LeapFrog a
worldwide, non-exclusive license to all of its current patents and patent applications, as well as patents related to
its business arising from applications filed by Tinkers & Chance or its principals through November 2014. On
January 4, 2008, the parties executed a formal agreement that memorialized in writing, the terms agreed to in
November 2007 and the pending litigation in federal district court for the Eastern District of Texas was dismissed
with prejudice.
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