LeapFrog 2002 Annual Report Download - page 89

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except share, per share and percent data)
The components of the Company’s deferred taxes are as follows:
December 31,
2002 2001
Deferred tax assets:
Inventory and other reserves ............................... $12,856 $ 5,503
Equity in affiliates ....................................... 698 698
Depreciation ............................................ 1,118 863
Other ................................................. 3,928 1,764
18,600 8,828
Deferred tax liabilities:
Amortization of intangibles ................................ (1,069) (2,560)
Net deferred tax assets ........................................ $17,531 $ 6,268
As of December 31, 2002 and 2001 the Company had net deferred tax assets of $17,531 and $6,268,
respectively. SFAS Statement 109, “Accounting for Income Taxes,” states that a valuation allowance must be
recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. Management has determined that the Company is more likely than not to
realize its entire deferred tax asset. Therefore, no valuation allowance has been established for 2002 or 2001. The
valuation allowance decreased by $1,298 and increased by $513 during the years ended December 31, 2001 and
2000, respectively.
The differences between the provision for income taxes and the income tax determined by applying the
statutory federal income tax rate of 35% for 2002 and 2001, and 34% for 2000 are as follows:
Year Ended December 31,
2002 2001 2000
Income tax at the statutory rate .................................. $25,295 $ 5,059 $(776)
State income taxes ............................................ 2,632 703 (104)
Nondeductible items ........................................... 108 111 404
Valuation allowance ........................................... — (1,298) 513
Other ....................................................... 794 209 (60)
Income tax provision (benefit) ................................... $28,829 $ 4,784 $ (23)
For federal income tax purposes the Company files a separate federal income tax return. However, due to its
status as part of a related taxpayer controlled group with Knowledge Universe, Inc., certain tax benefits are
limited. Further, it joins in the filing of several unitary/combined state tax returns with the Knowledge Universe,
Inc. group. The Company prepares its tax provision as if it were a stand-alone taxpayer subject to certain related
taxpayer controlled group limitations. Without such limitations, the 2002, 2001 and 2000 income tax provisions
would have been lower by approximately $1,000, $600 and $300, respectively.
In July 2002, the Company entered into a tax sharing agreement with Knowledge Universe, Inc. with respect
to certain state tax matters. In accordance with the agreement, the Company pays Knowledge Universe, Inc.
amounts equal to what its liability would have been if it had been a stand-alone taxpayer. During 2002, payments
totaling $300 were made to Knowledge Universe, Inc. pursuant to the tax sharing agreement for the 1998 through
2000 tax years. The liabilities computed under the tax sharing agreement for 2002, 2001, and 2000 and prior
years, were $2,500, $1,100, and $300, respectively. As of December 31, 2002, the Company had a payable to
Knowledge Universe, Inc. of approximately $3,600 related to the tax sharing agreement.
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