LeapFrog 2005 Annual Report Download - page 62

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. At December 31, 2005 and December 31, 2004, our cash
was invested primarily in money market funds, municipal auction rate securities and auction preferred securities.
Any adverse changes in interest rates or securities prices may decrease the value of our short-term investments
and operating results.
We are exposed to market risk from changes in interest rates on our outstanding cash and cash equivalents,
investments and bank debt. On our cash equivalents and investments we are exposed to changes in interest rates,
particularly short-term interest rates. On our debt, the level of the company’s actual average monthly borrowings
determines the interest rates we pay on borrowings. The interest rate will be between prime and prime plus
0.50% or LIBOR plus 1.75% and LIBOR plus 2.50%. 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 rate or
LIBOR. We had no outstanding debt at December 31, 2005 and December 31, 2004.
Item 8. Financial Statements and Supplementary Data.
See “Index to Consolidated Financial Statements” at page 62 below.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Attached as exhibits to this Form 10-K, there are “Certifications” of our Chief Executive Officer and the
Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, or the Rule 13a-14(a)
Certifications. This Controls and Procedures section of the annual report includes the information concerning the
controls evaluation referred to in the Rule 13a-14(a) Certifications and it should be read in conjunction with the
Rule 13a-14(a) Certifications for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
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 controls
evaluation was performed under the supervision and with the participation of management, including our Chief
Executive Officer or CEO and Chief Financial Officer or CFO. Disclosure controls are controls and procedures
designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the
U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed to reasonably
assure that such information is accumulated and communicated to our management, including the CEO and CFO,
as appropriate to allow timely decisions regarding required disclosure.
The evaluation of our disclosure controls included a review of the controls’ objectives and design, our
implementation of the controls and the effect of the controls on the information generated for use in this report.
In the course of the controls evaluation, we reviewed identified data errors and control problems and sought to
confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of
evaluation is performed on a quarterly basis so that the conclusions of management, including our CEO and
CFO, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on Form
10-Q and Form 10-K.
Based upon the controls evaluation, our CEO and CFO have concluded that, as a result of the matters
discussed below with respect to our internal control over financial reporting, our disclosure controls as of
December 31, 2005, were not effective.
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