LeapFrog 2007 Annual Report Download - page 31

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 $24.5 million, $25.9 million December 31, 2007 and 2006,
respectively, which are allocated to our U.S. Consumer segment. Pursuant to Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets,” 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, 2007 and 2006, 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.
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 steps that we believe are necessary to comply with
these laws and regulations, there can be no assurance that we 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 “Note 19 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 United States or abroad as a result of lower consumer spending, lower
consumer confidence, higher inflation, higher commodity prices, such as the price of oil, higher costs of capital,
restricted capital availability or constrained credit due to the subprime market distress, political conditions,
natural disaster, labor strikes or other factors could negatively impact our sales or profitability. In particular, if an
economic recession were to occur, it would likely have a more pronounced impact on discretionary spending for
products such as ours. Furthermore, armed hostilities, terrorism, natural disasters, or public health issues, whether
in the United States or abroad could cause damage and disruption to our company, our suppliers, our
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