LeapFrog 2008 Annual Report Download - page 43

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As of December 31, 2008, we held $5.0 million, stated at fair value, in long-term investments in auction rate
securities. The uncertainties in the credit and financial markets since the fourth quarter of 2007 have prevented us
from liquidating our ARS holdings as the amount of securities submitted for sale in periodic auctions has
exceeded the amount of purchase orders. The fair value of our auction rate securities investment has declined by
$9.0 million from its original cost value of $14.0 million, resulting in a total unrealized loss of the same amount,
which has been recorded as a loss on investments in our statements of operations in the appropriate periods. Due
to the illiquidity of these investments we have not included and do not intend, for the foreseeable future, to
include them as potential sources of liquidity in our future cash flow projections. Thus, we do not anticipate that
future declines in value, if any, will have an adverse impact on our future ability to support operations and meet
our obligations as they come due. Because the fair value of $5.0 million for the auction rate securities investment
constitutes less than 2% of our total assets at December 31, 2008, we also do not anticipate any material adverse
impact on our overall capital position should the fair value of these investments decline to zero.
We have an asset-backed revolving credit facility with a potential borrowing availability of $100.0 million
which is discussed in more detail below. There were no borrowings outstanding on this line of credit at
December 31, 2008.
Our retained deficit of $182.5 million at December 31, 2008 is not expected to impact our future ability to
operate, given our anticipated cash flows from operations, our strong cash position and the availability of our
credit facility.
Future capital expenditures are planned to be primarily for new product development and purchases related
to the upgrading of our information technology capabilities. We expect that capital expenditures in 2009,
including those for capitalized content and website development costs, will be lower than in prior years. Capital
expenditures were $23.4 million, $26.6 million and $20.4 million in 2008, 2007 and 2006, respectively. We
expect future capital expenditures will be funded with cash flows generated by operations.
We believe that cash on hand, cash flow from operations and amounts available under our revolving credit
facility will provide adequate funds for our foreseeable working capital needs and planned capital expenditures
over the next twelve months. We plan to invest where prudent; our 2009 strategies will be focused on driving
sales of our learn-to-read and educational gaming market platforms, introducing additional connected products,
expanding our content library, establishing parents’ familiarity with the Learning Path and expanding our online
play components. Our ability to fund our working capital needs and planned capital expenditures, as well as our
ability to comply with all of the financial covenants of our credit facility depend on our future operating
performance and cash flows, which in turn are subject to prevailing economic conditions, including the limited
availability of capital in light of the current financial crisis and to financial, business and other factors, some of
which are beyond our control.
Changes in Cash Flows
The table below shows our sources and uses of cash for the three fiscal years ended December 31, 2008,
2007 and 2006.
2008 2007 2006
% Change
2008 vs.
2007
% Change
2007 vs.
2006
(Dollars in millions)
Cash flows provided by (used in):
Operating activities ............................... $12.0 $(15.4) $ 90.4 178% -117%
Investing activities ............................... (23.4) 41.0 (77.5) -157% 153%
Financing activities ............................... (0.2) 1.9 4.2 -111% -55%
Effect of exchange rate fluctuations on cash ............ (2.8) (1.3) 1.8 -115% -172%
Increase (decrease) in cash and cash
equivalents ............................... $(14.4) $ 26.2 $ 18.9 -155% 39%
33