LeapFrog 2006 Annual Report Download - page 27

service trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. The contractual arrangements and the other steps we have taken to protect our intellectual
property may not prevent misappropriation of our intellectual property or deter independent third-party
development of similar technologies. The steps we have taken may not prevent unauthorized use of our
intellectual property, particularly in foreign countries where we do not hold patents or trademarks or where the
laws may not protect our intellectual property as fully as in the United States. Some of our products and product
features have limited intellectual property protection, and, as a consequence, we may not have the legal right to
prevent others from reverse engineering or otherwise copying and using these features in competitive products.
In addition, monitoring the unauthorized use of our intellectual property is costly, and any dispute or other
litigation, regardless of outcome, may be costly and time-consuming and may divert our management and key
personnel from our business operations. However, if we fail to protect or to enforce our intellectual property
rights successfully, our rights could be diminished and our competitive position could suffer, which could harm
our operating results. For additional discussion of litigation related to the protection of our intellectual property,
see “Part I, Financial Information, Note 11 to the Consolidated Financial Statements—“Commitments and
Contingencies,”—Legal Proceedings.—LeapFrog Enterprises, Inc. v. Fisher-Price, Inc. and Mattel, Inc.”
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 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.
Responding to any infringement claim, regardless of its validity, 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 of our
products or against the use of a trademark or copyright in the sale of some 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. For more information regarding this see “Part I, Financial Information, Note 11 to the Consolidated
Financial Statements—“Commitments and Contingencies,”—Legal Proceedings—Tinkers & Chance v.
LeapFrog Enterprises, Inc.”
Our net loss would be increased and our assets would be reduced if we are required to record impairment
of our intangible assets.
Intangible assets include the excess purchase price over the cost of net assets acquired, or goodwill.
Goodwill arose from our September 1997 acquisition of substantially all the assets and business of our
predecessor, LeapFrog RBT, and our acquisition of substantially all the assets of Explore Technologies in July
1998. Our intangible assets had a net balance of $25.9 million and $27.6 million at December 31, 2006 and 2005,
respectively, which are allocated to our U.S. Consumer segment. Pursuant to Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and other intangibles with
indefinite lives are tested for impairment at least annually. In determining the existence of impairment, we
consider changes in our strategy and in market conditions and this could result in adjustments to our recorded
asset balances. Specifically, we would be required to record impairment if the carrying values of our intangible
assets exceed their estimated fair values. Such impairment recognition would decrease the carrying value of
intangible assets and increase our net loss. At December 31, 2006 and 2005, we had $19.5 million of goodwill
and other intangible assets with indefinite lives. We tested our goodwill and other intangible assets with
indefinite lives for impairment during the fourth quarter by comparing their carrying values to their estimated fair
values. As a result of this assessment, we determined that no adjustments were necessary to the stated values.
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