LeapFrog 2003 Annual Report Download - page 53

United Kingdom. We began selling directly to retailers in Canada in June 2002, to retailers in France in July
2002, and to retailers in Mexico in September 2003, and we plan to enter the German-speaking markets in
Europe through our distributor, Stadlbauer Marketing + Vertrieb G.m.b.H., in the second half of 2004. We
derived approximately 14% of our net sales from outside the United States in 2003 and 10% in 2002. We intend
to increase our international sales through additional overseas offices to develop further our direct sales efforts,
distributor relationships and strategic relationships with companies with operations outside of the United States,
such as Benesse Corporation and Sega Toys in Japan. However, these and other efforts may not help increase
sales of our products outside the United States. Our business is, and will increasingly be, subject to risks
associated with conducting business internationally, including:
•political and economic instability, military conflicts and civil unrest;
•existing and future governmental policies;
•greater difficulty in staffing and managing foreign operations;
•complications in modifying our products for local markets or in complying with foreign laws, including
consumer protection laws and local language laws;
•transportation delays and interruptions;
•greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;
•trade protection measures and import or export licensing requirements;
•currency conversion risks and currency fluctuations;
•longer payment cycles, different accounting practices and problems in collecting accounts receivable;
and
•limitations, including taxes, on the repatriation of earnings.
Any difficulty with our international operations could harm our future sales and operating results.
Third parties have claimed, and may claim in the future, that we are infringing their intellectual property
rights, which may cause us to incur significant litigation or licensing expenses or to stop selling some or all
of our products or using some of our trademarks.
In the course of our business, we periodically receive claims of infringement or otherwise become aware of
potentially relevant patents, copyrights, trademarks or other intellectual property rights held by other parties.
Upon receipt of this type of communication, we evaluate the validity and applicability of allegations of
infringement of intellectual property rights to determine whether we must negotiate licenses or cross-licenses to
incorporate or use the proprietary technologies or trademarks or other proprietary matters in or on our products.
Any dispute or litigation regarding patents, copyrights, trademarks or other intellectual property rights, regardless
of its outcome, may be costly and time-consuming, and may divert our management and key personnel from our
business operations. If we, our distributors or our manufacturers are adjudged to be infringing the intellectual
property rights of any third party, we or they may be required to obtain a license to use those rights, which may
not be obtainable on reasonable terms, if at all. We also may be subject to significant damages or injunctions
against the development and sale of some or all of our products or against the use of a trademark in the sale of
some or all of our products. Our insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all the liability that could be imposed. We may presently be unaware of intellectual property
rights of others that may cover some or all of our technology or products. We will continue to be subject to
infringement claims as we increase the number and type of products we offer, as the number of products, services
and competitors in our markets grow, as we enter new markets and as our products receive more attention and
publicity. For additional discussion of litigation related to the protection of our intellectual property, see “Item 3.
Legal Proceedings.—Learning Resources, Inc. v. LeapFrog Enterprises, Inc.”Ifwefail to be successful against
these claims, it could require us to stop selling our LeapPad and other platforms and to pay damages.
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PART II