LeapFrog 2009 Annual Report Download - page 43

was offset by a weighted average decline in the value of the dollar during the fourth quarter of approximately
20%. The most significant decline in the dollar was against certain Asian currencies.
The increase in our loss from operations reflected declining net sales.
INCOME TAXES
Our income taxes (benefit) provision and our effective tax rates were $(7.2) million, $1.9 million and $3.7
million, and (72.8)%, 2.8 % and 3.8 % for the years ended December 31, 2009, 2008 and 2007, respectively. Our
pretax losses were $9.9 million, $66.5 million and $98.8 million for the same periods, respectively. Calculation
of the effective tax rates for all periods included a non-cash valuation allowance recorded against our domestic
deferred tax assets.
The 2009 income tax benefit was largely related to the release of tax reserves due to expiring statutes of
limitation. The income tax expense in 2008 and 2007 was primarily attributable to our foreign operations, which
were offset partially by a US federal income tax refund. In 2008 we received an income tax refund from the IRS
in settlement of an audit related to our research and development carry back claims for the years 2001 through
2003. The total 2008 tax benefit attributable to this refund was $1.9 million, including interest paid by the IRS.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Cash and cash equivalents totaled $61.6 million and $79.1 million at December 31, 2009 and 2008, respectively.
In line with our investment policy, all cash equivalents were invested in money market funds that held only high-
grade United States government obligations at December 31, 2009.
As of December 31, 2009, we held $3.7 million, stated at fair value, in long-term investments in auction rate
securities. The uncertainties in the credit and financial markets since the fourth quarter of 2007 have prevented us
from fully liquidating our ARS holdings as the number of securities submitted for sale in periodic auctions has
exceeded the number of purchase orders. In the fourth quarter of 2009, we were able to tender a portion of our
ARS holdings with original par value of $2.0 million. The fair value of our remaining ARS investment has
declined by $8.3 million from its original par value of $12.0 million. Due to the illiquidity of these investments,
we have not included and do not intend, for the foreseeable future, to include them as potential sources of
liquidity in our future cash flow projections. Thus, we do not anticipate that future declines in value, if any, will
have an adverse impact on our future ability to support operations and meet our obligations as they come due.
Because the fair value of $3.7 million for the auction rate securities investment constitutes only 1.2% of our total
assets at December 31, 2009, we also do not anticipate any material adverse impact on our overall capital
position should the fair value of these investments decline to zero.
As of September 30, 2009, our agreements with contract manufacturers were modified such that title and risk of
loss now transfer upon delivery of finished goods. Because we no longer hold title to any work-in-progress
inventory, our overall inventory balance is, and will continue to be, lower than it would have been had we not
modified our agreements.
We have an asset-backed revolving credit facility, which is discussed in more detail below, with a potential
borrowing availability of $75.0 million. There were no borrowings outstanding on this line of credit at
December 31, 2009.
Our accumulated deficit of $187.3 million at December 31, 2009 is not expected to impact our future ability to
operate, given our anticipated cash flows from operations, our strong cash position and the availability of our
credit facility.
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