LeapFrog 2006 Annual Report Download - page 28

We are subject to international, federal, state and local laws and regulations that could impose additional
costs or changes on the conduct of our business.
We operate in a highly regulated environment with international, federal, state and local governmental
entities regulating many aspects of our business, including products and the importation of products. Regulations
with which we must comply include accounting standards, taxation requirements (including changes in
applicable income tax rates, new tax laws and revised tax law interpretations), trade restrictions, regulations
regarding financial matters, environmental regulations, advertising directed toward children, safety and other
administrative and regulatory restrictions. Compliance with these and other laws and regulations could impose
additional costs on the conduct of our business. While we take all the steps we believe are necessary to comply
with these laws and regulations, there can be no assurance that have achieved compliance or that we will be in
compliance in the future. Failure to comply with the relevant regulations could result in monetary liabilities and
other sanctions which could have a negative impact on our business, financial condition and results of operations.
In addition, changes in laws or regulations may lead to increased costs, changes in our effective tax rate, or the
interruption of normal business operations that would negatively impact our financial condition and results of
operations.
From time to time, we are involved in litigation, arbitration or regulatory matters where the outcome is
uncertain and which could entail significant expense.
We are subject from time to time to regulatory investigations, litigation and arbitration disputes. As the
outcome of these matters is difficult to predict, it is possible that the outcomes of any of these matters could have
a material adverse effect on the business. For more information regarding litigation see “Part I, Financial
Information, Note 11 to the Consolidated Financial Statements—“Commitments and Contingencies,”—Legal
Proceedings” in this report.
Weak economic conditions, armed hostilities, terrorism, natural disasters, labor strikes or public health
issues could have a material adverse effect on our business.
Weak economic conditions in the U.S. or abroad as a result of lower consumer spending, lower consumer
confidence, higher inflation, higher commodity prices, such as the price of oil, political conditions, natural
disaster, labor strikes or other factors could negatively impact our sales or profitability. Furthermore, armed
hostilities, terrorism, natural disasters, or public health issues, whether in the U.S. or abroad could cause damage
and disruption to our Company, our suppliers or our customers or could create political or economic instability,
any of which could have a material adverse impact on our business. Although it is impossible to predict the
consequences of any such events, they could result in a decrease in demand for our product or create delay or
inefficiencies in our supply chain, by making it difficult or impossible for us to deliver products to our customers,
or for our manufacturers to deliver products to us, or suppliers to provide component parts.
Notably, our U.S. distribution centers, including our distribution center in Fontana, California, and our
corporate headquarters are located in California near major earthquake faults that have experienced earthquakes
in the past. In addition to the factors noted above, our existing earthquake insurance relating to our distribution
center may be insufficient and does not cover any of our other operations.
If we are unable to maintain the effectiveness of our internal control over financial reporting, we may not
be able to accurately report our financial results and our management may not be able to provide its
report on the effectiveness of our internal control over financial reporting as required by the Sarbanes-
Oxley Act.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2006 and December 31, 2005. The assessment as of December 31, 2006, concluded that these
controls were effective, and the assessment as of December 31, 2005 identified a material weakness in our
internal control over financial reporting for our financial statement close process. For more information, see
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