LeapFrog 2008 Annual Report Download - page 42

Other Income (Expense)
The components of other income (expense) were as follows:
2008 2007 2006
% Change
2008 vs.
2007
% Change
2007 vs.
2006
(Dollars in millions)
Other income (expense):
Interest income ..................................... $2.5 $7.0 $7.2 -64% -3%
Interest expense ..................................... (0.3) (0.1) (0.1) -200% 0%
Impairment losses on long-term investments (ARS) ........ (6.6) (2.5) — -164% n/a
Other, net .......................................... (1.9) (0.8) (0.9) -138% 11%
Total ......................................... $(6.3) $ 3.6 $ 6.2 -275% -42%
Fiscal Year 2008 Compared to Fiscal Year 2007
Interest income declined, due both to lower average excess cash balances available for investment and a
change in investment vehicles from a combination of money-market funds, commercial paper and other similar
short-term instruments in 2007 to only money market funds invested in high quality short-term U.S. government
obligations in 2008, which have lower yields due to their relatively low risk. Impairment losses on our auction
rate securities (“ARS”) increased in 2008 as the general economic uncertainty and adverse credit market
conditions deepened, driving lower valuations of these securities. The “other, net” category consists primarily of
gains (losses) on foreign exchange forward contracts, net of gains (losses) on the underlying transactions
denominated in foreign currency.
Fiscal Year 2007 Compared to Fiscal Year 2006
Other income (expense) declined in 2007 relative to 2006, primarily due to the impairment charge of $2.5
million related to our ARS investment which was recorded in the fourth quarter of 2007. The impairment resulted
from the deteriorating economy and the related auction failures held for ARS securities which severely impacted
their liquidity and market values.
INCOME TAXES
Our provision for income taxes and our effective tax rates were $1.9 million, $3.7 million and $26.6 million, and
(2.8) %, (3.8) % and (22.5) % for the years ended December 31, 2008, 2007 and 2006, respectively. Our pretax losses
were $66.4 million, $97.6 million and $118.5 million for the same periods, respectively. Calculation of the effective
tax rates for all periods included a non-cash valuation allowance recorded against our domestic deferred tax assets.
The tax expense for 2008 and 2007 was primarily attributable to our foreign operations. In 2008 we received
an income tax refund of $5.2 million from the IRS in settlement of an audit related to our research and
development carryback claims for the years 2001 through 2003. The total 2008 tax benefit attributable to this
refund was $1.9 million, including interest paid by the IRS. Tax expense for 2006 included a valuation allowance
of $25.0 million related to pre-2006 deferred tax assets; the remaining 2006 tax expense was largely attributable
to our foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Cash and cash equivalents totaled $79.1 million and $93.5 million at December 31, 2008 and 2007,
respectively. All cash equivalents were invested money market funds that held only high-grade United States
government obligations at December 31, 2008. At the end of 2007 we made a policy decision to invest our excess
cash in short-term U.S. government obligations only due to the continuing financial market crisis.
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