LeapFrog 2010 Annual Report Download - page 29

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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.
We are subject to the CPSIA, the Federal Hazardous Substances Act, the Flammable Fabrics Act, regulation by
the CPSC, and other similar federal, state and international rules and regulatory authorities, some of which have
conflicting standards and requirements. Our products could be subject to involuntary recalls and other actions by
these authorities. We may also have to write off inventory and allow 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.
If we were required to record impairment charges related to the value of our intangible assets, such
charges would have a negative impact on our results of operations.
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 U.S. 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, if the
carrying values of our intangible assets are found to exceed their estimated fair values, we might be required to
record impairment charges, which would decrease the carrying value of intangible assets and increase our net
loss or reduce any net income. As of December 31, 2010, intangible assets, net, totaled $25.2 million, of which
$19.5 million was attributable to goodwill.
Political developments, including trade relations, natural disasters, the threat or occurrence of armed
hostilities, terrorism, labor strikes or public health issues could have a material adverse effect on our
business.
Our business is international in scope. The deterioration of the political situation in a country in which we have
significant sales or operations, or the breakdown of trade relations between the U.S. and a foreign country in
which we have significant manufacturing facilities or other operations, could adversely affect our business,
financial condition, and results of operations. For example, a change in trade status for China could result in a
substantial increase in the import duty of toys manufactured in China and imported into the United States. In
addition , 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 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.
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