LeapFrog 2009 Annual Report Download - page 29

our customers to return products they purchased from us. In addition, any failures to comply could lead to
significant negative media attention and consumer dissatisfaction, which could harm our sales and lead to
widespread rejection of our products, particularly since we rely so heavily on the integrity of our brand. The
CPSIA, which was enacted in August 2008, required our customers to remove from the stream of commerce
certain of our products that did not meet the new federal standards for lead and other substances by February 10,
2009. Additional requirements under CPSIA will become effective through 2011, some of which could require
additional product returns and inventory write-offs.
Our net loss would be increased and our assets would be reduced if we are required to record impairment
charges related to the value of our intangible assets.
Our intangible assets include the excess purchase price over the cost of net assets acquired, or goodwill,
capitalized website development costs, patents, trademarks and licenses. 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. Total intangible assets are fully
allocated to our United States business segment. 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, which could result in adjustments to our recorded asset balances. Specifically, we
might be required to record impairment charges if the carrying values of our intangible assets exceeded their
estimated fair values. Such impairment recognition would decrease the carrying value of intangible assets and
increase our net loss. At December 31, 2009, intangible assets, net, totaled $22.2 million, of which $19.5 million
was attributable to goodwill.
Natural disasters, armed hostilities, terrorism, labor strikes or public health issues could have a material
adverse effect on our business.
Armed hostilities, terrorism, natural disasters, or public health issues, such as the recent outbreak of H1N1 flu,
whether in the United States or abroad could cause damage and disruption to our company, our suppliers, our
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.
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, 2009, Lawrence J. Ellison and entities controlled by him beneficially owned approximately
16.2 million shares of our Class B common stock, which represents approximately 52.4% 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;
19