LeapFrog 2008 Annual Report Download - page 46

Contractual Obligations and Commitments
LeapFrog has no off-balance sheet arrangements.
We conduct our corporate operations from leased facilities and rent equipment under operating leases.
Generally, these have initial lease periods of three to twelve years and contain provisions for renewal options of
five years at market rates. We account for rent expense on a straight-line basis over the term of the lease. The
following table summarizes our outstanding long-term contractual obligations at December 31, 2008.
Contractual Obligations at December 31, 2008
Payments Due by Period
Total
Less Than 1
Year 1-3 Years 4-5 Years
More Than
5 Years
(Dollars in millions)
Operating leases .................................. $37.4 $ 8.6 $16.2 $ 3.8 $ 8.8
Royalty guarantees ................................ 14.3 5.1 8.7 0.5 —
Capital leases .................................... 0.4 0.3 0.1 — —
Purchase obligations .............................. 24.8 24.8 — — —
Total ....................................... $76.9 $38.8 $25.0 $ 4.3 $ 8.8
At December 31, 2008, we had no outstanding borrowings or letters of credit under our asset-backed line of
credit facility with Bank of America. At December 31, 2008, we had $100.0 million of potential availability on
the line. In addition, we had commitments to purchase inventory totaling approximately $24.8 million at
December 31, 2008.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our financial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP” or “GAAP”). Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. We believe that certain accounting policies, which we refer to as critical accounting policies, are
particularly important to the portrayal of our financial position and results of operations and require the use of
significant estimates and the application of significant judgment by our management. On an on-going basis, we
evaluate our estimates, particularly those related to our critical accounting policies which include: revenue
recognition, evaluation of our accounts receivable-related allowances for doubtful accounts, sales and product
returns and cooperative advertising arrangements with customers, the valuation and nature of impairments of
financial instruments, valuation and amortization of capitalized content costs, inventory valuation, the
recognition, measurement and valuation of current and deferred income tax assets and liabilities, valuation of
goodwill and stock-based compensation assumptions.
Revenue is recognized when products are shipped and title passes to the customer, provided that there is
evidence of a commercial arrangement, delivery has occurred, there is a fixed or determinable fee and collection
is reasonably assured. For online downloads, delivery is considered to occur when the download occurs. For
professional training services, delivery is considered to occur when the training has been performed. Net sales
represent gross sales less negotiated price allowances based primarily on volume purchasing levels, estimated
returns, allowances for defective products, markdowns and other sales allowances for customer promotions. A
small portion of our revenue related to subscriptions is recognized as revenue over the period of the subscription.
We reduce accounts receivable by an allowance for amounts we believe may become uncollectible.
Determining the amounts that may become uncollectible requires judgment that may have a significant effect on
the amounts reported in accounts receivable. This allowance is an estimate based primarily on our management’s
evaluation of the customer’s financial condition in the context of current economic conditions, past collection
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