LeapFrog 2008 Annual Report Download - page 79

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
of approximately $1,200. Mounte LLC is indirectly controlled by Michael R. Milken, Lowell J. Milken and
Lawrence J. Ellison, who beneficially own a majority of our voting shares. The parties are awaiting the results of a
California state audit of Mounte LLC before proceeding with discussions. The Company does not expect the
settlement of this dispute to have a material effect on its financial statements.
10. Borrowings Under Credit Agreements
In November 2005, the Company entered into a $75,000 asset-based revolving credit facility with Bank of
America. In May 2008, the Company, certain banks, financial institutions and other institutional lenders and
Bank of America entered into Amendment No. 1 (the “Amendment”) to the original credit facility agreement
(“Agreement”), increasing the maximum borrowing availability on the credit line from $75,000 to $100,000. The
Company granted security interests in substantially all of its assets as collateral for the loans under the credit
facility agreement, as amended. The borrowing availability on the line varies according to the levels of the
Company’s eligible accounts receivable, eligible inventory and cash and investment securities deposited in
secured accounts with the administrative agent or other lenders. Availability under this agreement was $28,165
as of December 31, 2008. The termination date of the agreement and the maturity date for any outstanding loans
under the facility is November 8, 2010. Bank of America is committed to lend up to 75% of the total borrowing
and Wachovia Capital Finance Corporation is committed to lend the remaining 25%. The interest rate for the
Company’s revolving credit facility is, at its election, the Bank of America prime rate (or base rate) or a LIBOR
rate defined in the credit agreement, plus, in each case, an applicable margin. The applicable margin for a loan
depends on the average monthly usage and the type of loan.
Among other customary covenants, the Agreement contains a fixed charge coverage ratio covenant. The
Company is required to maintain a ratio of EBITDA to fixed charges, as defined in the Agreement, of at least 1.0
to 1.0 when the covenant is required to be tested. The ratio is measured only if certain borrowing-availability
thresholds are not met. The Company expects to meet or exceed these borrowing-availability thresholds and be in
compliance with all related requirements in 2009. The Agreement also contains customary events of default and
prohibits the payment of cash dividends on the Company’s common stock. If an event of default occurs, the
lenders may terminate their commitments, declare all borrowings under the credit facility as due immediately and
foreclose on the collateral. As of December 31, 2008, the Company was in compliance with all of its covenants
under the Agreement.
The Company borrowed $30,000 under this line on October 1, 2008. The borrowing was repaid in full by
December 15, 2008. Total interest expense on the borrowing was $247 during 2008 as compared to $0 in 2007.
There were no borrowings outstanding under this agreement at December 31, 2008.
11. Concentrations of Credit Risk and Certain Other Risks
Financial instruments that subject the Company to concentrations of credit risk include cash equivalents,
foreign exchange transactions, long-term investments and trade receivables. Cash and cash equivalents consist
principally of cash and money market funds. Long-term investments consist of auction rate securities, which are
presently illiquid and have experienced significant impairment losses since the fourth quarter of 2007 due to the
adverse credit and financial markets conditions which have prevailed since then. The carrying value of the
Company’s investment in auction rate securities has declined 65% from its original book value, or par, as of
December 31, 2008. The adverse economic conditions are expected to continue into 2009 and further impairment
losses may be incurred. Foreign exchange transactions consist primarily of short-term foreign currency
transactions with highly rated financial institutions.
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