LeapFrog 2008 Annual Report Download - page 78

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
During the fourth quarter of 2008, LeapFrog implemented a company-wide reduction in force that affected
70 employees, approximately 10% of the global workforce as of the date of the reduction in force. The Company
ceased using its school-related facility in Austin, Texas related to its former School segment and one of four
suites in its Emeryville, California headquarters as of November 30, 2008, and vacated both office sites. The
associated costs were accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities” (“SFAS 146”).
In accordance with the guidelines of SFAS 146, the liabilities for both the one-time termination benefits and
the facilities-related cease-use costs were recorded at fair value. Fair value for the one-time termination benefits
equaled the stated value of the benefits. The fair values of future lease expenses were calculated based on the net
of the remaining contractual lease rental payments reduced by estimated sublease rentals that management
believes could be reasonably obtained for the facilities, discounted to present value using the Company’s credit-
adjusted risk-free rate, and then offset by deferred rent credits. The credit-adjusted risk-free rate used in the
calculation was 5.37%. The total restructuring expenses of $3,770 recorded in 2008 in selling, general and
administrative expenses consisted of $1,401 in employee termination benefits and $2,369 in facility closure
costs. At December 31, 2008, the related liabilities totaled $3,664, of which $1,935 was classified as short term
and the remaining $1,729 was classified as long term. The Company will evaluate the carrying value of the
liabilities as required by SFAS 146 on an annual basis, or more frequently if circumstances warrant doing so, and
adjust the fair value liabilities as needed.
The Company licenses certain of its content from third parties under exclusive and nonexclusive
agreements, which permit the Company to utilize characters, stories, illustrations and trade names throughout
specified geographic territories. Royalty payments are typically calculated as a percentage of the unit product
selling price. Royalty expense is recorded when the products are shipped to a customer, and is reported under
cost of sales in the statements of operations. The total amount of royalty expense related to these license
agreements was $19,315, $21,768, and $14,839, for 2008, 2007 and 2006, respectively. LeapFrog recorded
$9,037 and $8,114 in the liability for accrued royalties at December 31, 2008 and 2007, respectively.
9. Related Party Transactions
Since 2004, the Company has been a majority-owned subsidiary of Mollusk Holdings, LLC, an entity
controlled by Lawrence J. Ellison, the Chief Executive Officer of Oracle Corporation. In 2008 and 2007, the
Company purchased software products and support services from Oracle Corporation on terms the Company
believes are comparable to those it would obtain in an arm’s-length agreement totaling $1,095 and $481,
respectively. As of December 31, 2008, Mr. Ellison may be deemed to have or share the power to direct the
voting and disposition, and therefore to have beneficial ownership of approximately 16.2 million shares of our
Class B common stock, which represents approximately 52.4% of the combined voting power of our Class A
common stock and Class B common stock. For a more complete discussion of Mr. Ellison’s beneficial ownership
of our common stock, see “Security Ownership of Certain Beneficial Owners and Management.”
In 2008 and 2007, the Company paid Pillar Data Systems, Inc. a total of $261 and $337, respectively, in
arm’s-length transactions for equipment fees. Lawrence J. Ellison is the majority stockholder of Pillar Data
Systems, Inc.
We are involved in a dispute with Mounte LLC arising out of a 2002 tax sharing agreement between LeapFrog
and Knowledge Universe, Inc., the predecessor in interest of Mounte LLC. We are claiming a $635 refund of
amounts we previously paid under the agreement, while Mounte LLC is claiming we owe it an additional payment
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