LeapFrog 2008 Annual Report Download - page 83

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
valuation allowance under the provisions of SFAS 109. The valuation allowance in both 2008 and 2007 includes
$8,503 related to excess tax benefits of stock option deductions prior to the adoption of SFAS 123(R). The
benefits will increase additional paid-in capital when realized. The Company intends to maintain a valuation
allowance until sufficient positive evidence exists to support its reversal. Should the Company determine that it
would be able to realize all or part of its deferred tax asset in the future, an adjustment to the valuation allowance
would be recorded in the period such determination was made. The majority of the Company’s domestic deferred
tax assets generally have 10 to 20 years until expiration or indefinite lives.
As of December 31, 2008, the Company had federal net operating loss carryforwards of $203,582, which
will expire in 2025 through 2028. State net operating loss carryforwards totaling $203,653 as of December 31,
2008, will expire in years 2009 through 2030. In addition, the Company had $2,215 related to excess tax benefits
of stock option deductions which are not included in the net operating loss carrforward amounts above since they
have not met the realization criteria of SFAS 123(R). The tax benefits from these deductions will increase
additional paid-in capital when realized. As of December 31, 2008, the Company also had federal and California
research and development credit carryforwards of $2,633 and $5,601, respectively. The federal research
carryforwards will expire beginning in 2024, while the California research credits can be carried forward
indefinitely. In addition, the Company has $3,550 in federal foreign tax credits that will expire beginning in
2018.
Effective January 1, 2007, the Company adopted the provisions of FIN 48. As a result of the implementation
of FIN 48, the Company recognized an approximate increase of $7,284 in the liability for unrecognized tax
benefits as of January 1, 2007. Of this amount, $635 was accounted for as an increase in the January 1, 2007
balance of accumulated deficit. The remaining amount decreased tax loss carryforwards in the United States,
which are fully offset by a valuation allowance.
The changes in the balance of gross unrecognized tax benefits, including related interest and penalties,
during the years ended December 31, 2008 and 2007 are set out in the following table:
December 31,
2008 2007
Balance at beginning of year ....................................... $30,727 $26,148
Gross increase—tax positions taken during a prior period .............. 1,365 2,485
Gross decrease—tax provisions taken during a prior period ............ (3,591) —
Tax positions taken during the current period ........................ 1,415 2,154
Decreases in the unrecognized tax benefits relating to settlements with
taxing authorities ............................................ (925) (60)
Balance at end of year ..................................... $28,991 $30,727
The balances of gross unrecognized tax benefits at December 31, 2008 and 2007 are $28,991 and $30,727
respectively, of which $15,769 and $15,409 would affect our effective tax rate if recognized. The balances of
unrecognized tax benefits at December 31, 2007 have been revised for 2008 presentation to exclude related
interest and penalties.
We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax
expense for the years ended December 31, 2008, 2007 and 2006 includes $1,821, $1,091 and $826, respectively,
of interest and penalties. As of December 31, 2008 and 2007 we had approximately $4,964 and $3,143,
respectively, of accrued interest and penalties related to uncertain tax positions.
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