LeapFrog 2008 Annual Report Download - page 84

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
The Company is monitoring the statutes of limitation for the assessment and collection of income taxes. The
Company believes it is reasonably possible that the total amount of unrecognized tax benefits in the future could
decrease by up to $6,399 related to its foreign operations over the course of the next twelve months due to
expiring statutes of limitations. Of this amount, up to $4,220 could be recognized as a tax benefit and affect the
effective tax rate.
Open and Resolved Tax Matters
The Company files income tax returns in the U.S. federal, various states and foreign jurisdictions. The
Company has substantially concluded all U.S. federal and state income tax matters through 1999. During the
quarter ended June 30, 2008, the Internal Revenue Service (“IRS”) completed its audit of the Company’s
research and development carryback claims for the period of 2001-2003. As a result of the settlement, the
Company received a $5,238 refund from the IRS in July 2008 and recognized $925 of previously unrecognized
tax benefit. The total 2008 tax benefit attributable to this refund was $1,918, including interest paid by the IRS.
The United Kingdom’s taxing authority completed its review of the 2004 and 2005 tax years and issued “no
change” notices for both years. The state of California (“state”) has notified the Company of a pending
examination related to its research and experimentation credits claimed for the tax years 2001, 2002 and 2003;
however, the Company has not been notified when the audit will commence. The outcome of the state audit is not
yet determinable.
With respect to open matters, the outcomes are not yet determinable. However, management does not
anticipate that any adjustments would result in a material change to the Company’s results of operations,
financial conditions or liquidity.
13. Employee Benefit Plan
LeapFrog sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code.
Effective September 1, 2005, the 401(k) plan provides that employees may defer up to 100% of their annual
compensation, not to exceed the IRS maximum contribution limit. LeapFrog will match 50% of employee
contributions up to the lesser of $2 or 6% of the participant’s compensation per plan year. Matching contributions
vest over three years. During 2008, 2007 and 2006, the Company recorded total compensation expense of
$799, $592 and $829, respectively, related to the defined contribution plan.
14. Stock-Based Compensation
Pursuant to the Company’s 2002 Equity Incentive Plan and its 2002 Non-Employee Directors’ Stock Award
Plan, (collectively, the “Plans”), the Company issues stock options, restricted stock awards (“RSAs”) and
restricted stock units (“RSUs”) to its employees, directors and occasionally to non-employee service providers, to
purchase shares of the Company’s Class A common stock. The maximum term of the stock-based awards is 10
years. The required vesting period is generally four years. Effective February 28, 2007, the Company terminated
its performance share program after conducting a full review of the total compensation components for key
executives. There were no performance shares outstanding at December 31, 2008 and 2007. The Company also
has an employee stock purchase plan (“ESPP”) which is authorized under the Plans.
On June 5, 2008, the stockholders of the Company approved a stock option exchange program, as described in
the Company’s definitive proxy statement for its 2008 Annual Meeting of Stockholders, filed with the SEC on
April 21, 2008. Under the option exchange program (“Program”) the Company offered to exchange, for new lower-
priced options, certain outstanding options previously granted under the Company’s Plans and under two special
F-26