LeapFrog 2007 Annual Report Download - page 32

manufacturers, 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, 2007 and December 31, 2006. The assessment as of December 31, 2007 and 2006, concluded that these
controls were effective. For more information, see “Item 9A—Controls and Procedures” in this report on our
assessment of our internal control over financial reporting. We received an unqualified opinion from our external
auditors on our financial statements for the years ended December 31, 2007 and 2006. Areas of our internal
control over financial reporting may require improvement from time to time. If management is unable to assert
that our internal control over financial reporting is effective at any time in the future, or if our external auditors
are unable to express an opinion that our internal control over financial reporting is effective, investors may lose
confidence in our reported financial information, which could result in the decrease of the market price of our
Class A common stock.
One stockholder controls a majority of our voting power as well as the composition of our board of
directors.
Holders of our Class A common stock will not be able to affect the outcome of any stockholder vote. Our
Class A common stock entitles its holders to one vote per share, and our Class B common stock entitles its
holders to ten votes per share on all matters submitted to a vote of our stockholders. As of December 31, 2007,
Lawrence J. Ellison and entities controlled by him beneficially owned approximately 16.6 million shares of our
Class B common stock, which represents approximately 53% of the combined voting power of our Class A
common stock and Class B common stock. As a result, Mr. Ellison controls all stockholder voting power,
including with respect to:
• the composition of our board of directors and, through it, any determination with respect to our business
direction and policies, including the appointment and removal of officers;
• any determinations with respect to mergers, other business combinations, or changes in control;
• our acquisition or disposition of assets;
• our financing activities; and
• payment of dividends on our capital stock, subject to the limitations imposed by our credit facility.
Mr. Ellison could have interests that diverge from those of our other stockholders. This control by
Mr. Ellison could depress the market price of our Class A common stock; deter, delay or prevent a change in
control of LeapFrog; or affect other significant corporate transactions that otherwise might be viewed as
beneficial for other stockholders.
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