LeapFrog 2011 Annual Report Download - page 27

products they purchased from us. Moreover, any failures to comply with laws and regulations could lead to
significant negative media attention and consumer dissatisfaction, which could harm our sales and lead to
widespread rejection of our products, particularly since we rely so heavily on the integrity of our brand. In
addition, numerous states have enacted, and many others are considering enacting, laws directed at
manufacturers regarding recycling of electronic products. While we take steps that we believe are necessary to
comply with these laws and regulations, there can be no assurance that we have achieved compliance or that
we will be in compliance in the future. Failure to comply with the relevant regulations could result in
monetary liabilities and other sanctions, which could have a negative impact on our business, financial
condition and results of operations. In addition, changes in laws or regulations may lead to increased costs,
changes in our effective tax rate, or the interruption of normal business operations that would negatively
impact our financial condition and results of operations.
Political developments, including trade relations, natural disasters, the threat or occurrence of
armed hostilities, terrorism, labor strikes or public health issues could have a material adverse effect
on our business.
Our business is international in scope. The deterioration of the political situation in a country in which we
have significant sales, operations or third party manufacturers or suppliers, or the breakdown of trade relations
between the U.S. and a foreign country in which we have or utilize significant manufacturing facilities or have
other operations, could adversely affect our business, financial condition, and results of operations. For
example, a change in trade status for China could result in a substantial increase in the import duty of toys
manufactured in China and imported into the U.S. In addition, armed hostilities, terrorism, natural disasters, or
public health issues, whether in the U.S. or abroad could cause damage and disruption to our company, our
suppliers, our manufacturers, or our customers or could create political or economic instability, any of which
could have a material adverse impact on our business. Although it is impossible to predict the consequences
of any such events, they could result in a decrease in demand for our product or create delay or inefficiencies
in our supply chain by making it difficult or impossible for us to deliver products to our customers, or for our
manufacturers to deliver products to us, or suppliers to provide component parts.
Notably, our U.S. distribution centers, including our distribution center in Fontana, California, and our
corporate headquarters are located in California near major earthquake faults that have experienced
earthquakes in the past and are expected to do so in the future. In addition to the factors noted above, our
existing earthquake insurance relating to our distribution center may be insufficient and does not cover any of
our other operations.
The loss of members of our executive management team or other key employees could adversely affect
our business.
We have had a number of changes to our executive management team during 2010 and 2011. These changes
had an immediate financial impact as a result of the payment of severance compensation and charges
associated with equity grants for the retention of new management. While these changes can be a positive
long-term change for us, there is an inherent loss of institutional knowledge associated with such turnover and
this may create a risk, among other things, of overloading the remaining executives. In addition, transition
associated with such changes has required, and may continue to require, significant management attention and
consumption of time and resources, diverting away from the regular operations of our business. New
executives typically bring change to an organization, as a result of implementing new goals and plans, which
in turn can lead to changes in operating direction and the associated impact on the operations of the business,
which may be uncertain or unknown. Furthermore, we cannot provide any assurances that we will retain our
new or existing management and other key employees. Competition for high caliber personnel is strong in our
area and industry. The loss of services of members of our executive management team or other key employees
could have an adverse effect on our business. If we are unable to retain key personnel, then it may be difficult
for us to maintain a competitive position within our industry or implement our strategic priorities.
17