LeapFrog 2011 Annual Report Download - page 71

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Starting in 2006, the Company recorded a non-cash charge to establish a valuation allowance against all of its
gross domestic deferred tax assets. The Company considered all available evidence, positive and negative, and
concluded that a full valuation allowance should continue to be established against its domestic deferred tax
assets as the Company does not believe it is more likely than not that the benefit of those assets will be fully
realized in the future. The valuation allowance in both 2011 and 2010 includes $8,503 related to excess tax
benefits of stock option deductions prior to the adoption of the authoritative guidance regarding stock-based
compensation. 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, 2011, the Company had federal net operating loss carryforwards of $201,013 which will
expire between 2025 through 2029. State net operating loss carryforwards totaled $219,632 as of
December 31, 2011 and will expire in years 2012 through 2031. The valuation allowance was reduced in the
current year due to the utilization of certain net operating loss and state tax credit balances. In addition, the
Company had $3,242 related to excess tax benefits of stock option deductions which are not included in the
net operating loss carryforward amounts above since they have not met the required realization criteria. The
Company considers stock option deduction benefits in excess of book compensation charges realized when it
obtains an incremental benefit determined by the ‘‘With and Without’’ calculation method, under which excess
tax benefits related to stock-based compensation are not deemed to be realized until after the utilization of all
other tax benefits available to the Company. As of December 31, 2011, the Company also had federal and
California research and development credit carryforwards of $3,992 and $8,301, respectively. The federal
research carryforwards will begin to expire in 2023, while the California research credits can be carried
forward indefinitely. In addition, the Company has $3,659 in federal foreign tax credits that will begin
expiring in 2017.
The changes in the balance of gross unrecognized tax benefits, during the years ended December 31, 2011 and
2010 were as follows:
Years Ended December 31,
2011 2010 2009
Balance at beginning of year .............................. $21,608 $22,080 $28,991
Gross increase − tax positions taken during a prior period .......... 65 310 978
Gross decrease − tax positions taken during a prior period .......... (223) (996) (1,214)
Increases due to tax positions taken during the current period ....... — 440 633
Decreases in the unrecognized tax benefits relating to statute of
limitations expiration ................................. (1,957) (226) (7,308)
Decreases in the unrecognized tax benefits relating to settlements with
taxing authorities .................................... — — —
Balance at end of year ............................... $19,493 $21,608 $22,080
The balances of gross unrecognized tax benefits at December 31, 2011, 2010 and 2009 are $19,493, $21,608
and $22,080, respectively, of which $5,187, $7,226 and $8,044 would affect the Company’s effective tax rate
if recognized. However, an additional $14,306, $14,382 and $14,036 would impact the Company’s effective
rate if the valuation allowance currently established against the Company’s domestic deferred tax assets were
to reverse.
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