LeapFrog 2004 Annual Report Download - page 61

on importation of products caused by health epidemic-related issues, labor disputes, terrorism, international
incidents, quarantines, lack of available shipping containers or otherwise could significantly harm our business
and reputation. For example, in 2002, a key collective bargaining agreement between the Pacific Maritime
Association and the International Longshore and Warehouse Union affecting shipping of products to the Western
United States, including our products, expired and, after a temporary extension, resulted in an eleven-day
cessation of work at West Coast docks. This cessation of work cost us approximately $3.0 million in additional
freight expenses. In addition, in July 2004, independent truck drivers went on strike causing slowdowns in
container transport to and from ports across the United States. Although these disputes have been resolved, other
disputes may arise or additional security measures may be enacted in regards to shipping and shipping
containers, which may cause delays in the delivery of our products and significantly harm our business and
reputation.
Any errors or defects contained in our products, or our failure to comply with applicable safety standards,
could result in delayed shipments or rejection of our products, damage to our reputation and expose us to
regulatory or other legal action.
We have experienced, and in the future may experience, delays in releasing some models and versions of
our products due to defects or errors in our products. Our products may contain errors or defects after
commercial shipments have begun, which could result in the rejection of our products by our retailers, damage to
our reputation, lost sales, diverted development resources and increased customer service and support costs and
warranty claims, any of which could harm our business. Children could sustain injuries from our products, and
we may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities
may exceed, or fall outside the scope of, our insurance coverage. Moreover, we may be unable to retain adequate
liability insurance in the future. We are subject to the Federal Hazardous Substances Act, the Flammable Fabrics
Act, regulation by the Consumer Product Safety Commission, or CPSC, and other similar federal and state rules
and regulatory authorities. Our products could be subject to involuntary recalls and other actions by such
authorities. Concerns about potential liability may lead us to recall voluntarily selected products. For example, in
December 2000, the CPSC announced our voluntary repair program for the approximately 900,000 units of our
Alphabet Pal product sold prior to that date. We had instituted the repair proceedings with the CPSC because we
were concerned that the product could cause injury. Our costs in connection with the repair were approximately
$1.1 million. Any recalls or post-manufacture repairs of our products could harm our reputation, increase our
costs or reduce our net sales.
Outbreaks of health epidemics, such as Severe Acute Respiratory Syndrome, or SARS, and the so-called
“Asian bird flu” may adversely impact our business or the operations of our contract manufacturers or
our suppliers.
In the past, outbreaks of SARS have been significantly focused on Asia, particularly in Hong Kong, where
we have an office, and in the Guangdong province of China, where almost all of our finished goods
manufacturers are located. In addition, recent outbreaks of avian influenza, or “Asian bird flu,” have occurred
throughout Asia, including cases in Guangdong province. The design, development and manufacture of our
products could suffer if a significant number of our employees or the employees of our manufacturers or their
suppliers contract SARS or Asian bird flu or otherwise are unable to fulfill their responsibilities or quarantine or
other disease-mitigation measures disrupt operations. In the event of any significant outbreak, quarantine or other
disruption, we may be unable to quickly identify or secure alternate suppliers or manufacturing facilities and our
results of operations would be adversely affected.
Earthquakes or other events outside of our control may damage our facilities or the facilities of third
parties on which we depend.
Our U.S. distribution centers, including our new distribution center in Fontana, California, our Los Gatos,
California engineering office and our corporate headquarters are located in California near major earthquake faults
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