LeapFrog 2008 Annual Report Download - page 82

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
State income tax expense above included a valuation allowance of $3,220, $6,580 and $10,854 for 2008,
2007 and 2006, respectively. State income tax expense also included interest and penalties of $157, $124 and $28
for 2007, 2006 and 2005, respectively. Total income tax expense of $26,611 in 2006 includes $24,993 related to
establishing the valuation allowance in 2006.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $19.4 million at
December 31, 2008. The earnings are considered to be permanently reinvested and, accordingly, no deferred
United States income taxes have been provided thereon. Upon distribution of these earnings in the form of
dividends or otherwise, the Company would not be subject to U.S. income tax due as any tax liability generated
would be offset by net operating loss carryforwards.
The components of the Company’s deferred taxes are as follows:
December 31,
2008 2007
Deferred tax assets:
NOL and credits carryover ................................... $ 88,709 $ 76,120
Inventory and other reserves ................................. 16,424 11,550
Depreciation and amortization ................................ 7,644 4,359
Other .................................................... 18,058 13,080
Less: valuation allowance .................................... (127,083) (101,491)
Total deferred tax assets ............................... $ 3,752 $ 3,618
Deferred tax liabilities:
Goodwill and tax depreciation ................................ 2,637 1,815
Total deferred tax liabilities ............................ $ 2,637 $ 1,815
Starting in 2006, the Company recorded a non-cash charge to establish a valuation allowance against its
gross domestic deferred tax assets. The amount represents 100% of the domestic deferred tax assets as set out in
the table below.
December 31,
2008 2007
Current deferred tax asset ...................................... $ 18,627 $ 12,034
Less: valuation allowance ......................................... (18,627) (12,034)
Net total ................................................. $ — $ —
Non-current deferred tax asset ................................... $108,457 $ 89,457
Less: valuation allowance ......................................... (108,457) (89,457)
Net total ................................................. $ — $ —
The valuation allowance is calculated in accordance with the provisions of SFAS 109, which requires an
assessment of both positive and negative evidence when measuring the need for a valuation allowance. The
Company’s domestic net operating losses for the most recent three-year period, the additional net operating
losses in 2008 and changes in its business strategy increased the uncertainty that the level of future profitability
needed to record the deferred assets would be achieved and represented sufficient negative evidence to require a
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