LeapFrog 2003 Annual Report Download - page 59

Sales of our shares could negatively affect the market price of our stock.
Sales of substantial amounts of shares in the public market could harm the market price of our Class A
common stock. We had approximately 59.2 million shares of Class A common stock outstanding as of December
31, 2003, assuming the conversion of all outstanding Class B common stock into Class A common stock, and
assuming no exercise of our then-outstanding options. A number of these 59.2 million shares are restricted
securities as defined by Rule 144 adopted under the Securities Act of 1933, as amended, or the Securities Act.
These shares may be sold in the public market only if registered or if they qualify for an exemption from
registration under the Securities Act, including exemptions provided by Rules 144 and 701. We cannot predict
the effect that future sales made under Rule 144, Rule 701 or otherwise will have on the market price of our
Class A common stock.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We develop products in the United States and market our products primarily in North America and, to a
lesser extent, in Europe and the rest of the world. We are billed by and pay our third-party manufacturers in U.S.
dollars. Sales to our international customers are transacted primarily in the country’s local currency. As a result,
our financial results could be affected by factors such as changes in foreign currency rates or weak economic
conditions in foreign markets. In 2003, we experienced a foreign currency exchange gain of approximately $2.0
million, as compared to a foreign currency exchange gain of approximately $1.0 million in 2002. Prior to 2002,
exchange rate fluctuations had little impact on our operating results.
Beginning in the first quarter of 2004, we began managing our foreign currency transaction exposure by
entering into short-term forward contracts. The purpose of this hedging program is to minimize the foreign
currency exchange gain or loss reported in our financial statements.
Cash equivalents and short term investments are presented at fair value on our balance sheets. We invest our
excess cash in accordance with our investment policy. Any adverse changes in interest rates or securities prices
may harm the valuation of our short term investments and operating results. At December 31, 2003 and
December 31, 2002, our cash was invested primarily in municipal money market funds, short term fixed income
municipal securities and auction preferred securities.
We are exposed to market risk from changes in interest rates on our outstanding bank debt. The level of a
certain financial ratio maintained by us determines interest rates we pay on borrowings. The interest rate will be
between prime and prime plus 0.25% or LIBOR plus 1.25% and LIBOR plus 2.00%. Prime rate is the rate
publicly announced by Bank of America as its prime rate The interest cost of our bank debt is affected by
changes in either prime rates or LIBOR. Any adverse changes could harm our operating results. We had no
outstanding debt at December 31, 2003.
Item 8. Financial Statements and Supplementary Data.
See “Index to Consolidated Financial Statements” at page F-1 below.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation of LeapFrog’s Disclosure Controls and Internal Controls
As of the end of the period covered by this annual report on Form 10-K, we evaluated the effectiveness of
the design and operation of our “disclosure controls and procedures,” or “Disclosure Controls.” This evaluation,
or “Controls Evaluation,” was performed under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer.
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PART II