LeapFrog 2010 Annual Report Download - page 46

The loan agreement contains customary events of default, including for payment failures; failure to comply with
covenants; failure to satisfy other obligations under the credit agreement or related documents; defaults in respect
of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; change-in-control provisions;
and the invalidity of guaranty or security agreements. If any event of default under the loan agreement occurs, the
lenders may terminate their respective commitments, declare immediately due all borrowings under the facility
and foreclose on the collateral. A cross-default provision applies if a default occurs on other indebtedness in
excess of $5.0 million and the applicable grace period in respect of the indebtedness has expired, such that the
lender of, or trustee for, the defaulted indebtedness has the right to accelerate. We are also required to maintain a
ratio of Earnings Before Interest, Taxes, Depreciation and Amortization to fixed charges, or EBITDA, as defined
in the loan agreement, of at least 1.1 to 1.0 when the covenant is required to be tested. The ratio is measured only
if certain borrowing-availability thresholds are not met.
During the fourth quarter of 2010, we borrowed a total of $42.0 million on the line with an interest rate per
annum of 4.38% through the final repayment date, and repaid the full amount during the same quarter from cash
provided by operations. We had no borrowings outstanding under this agreement at December 31, 2010.
On January 31, 2011, we entered into an amendment to the agreement that, among other things: (i) extends the
maturity date of the agreement to August 13, 2013, (ii) reduces, starting January 1, 2011, the applicable interest
rate margins to a range of 0.50% to 1.00% above the applicable base rate for base rate loans, as compared to
3.00% above the applicable base rate in the original agreement, and 2.25% to 2.75% above the applicable LIBOR
rate for LIBOR rate loans, as compared to 4.00% above the applicable LIBOR rate in the original agreement, in
each case depending on our borrowing availability, and (iii) reduces, starting January 1, 2011, the unused line fee
to 0.375% per year if utilization of the line is greater than or equal to 50%, and to 0.50% per year if utilization of
the line is less than 50%, as compared to 1.00% per year in the original agreement.
Contractual Obligations and Commitments
We have no off-balance sheet arrangements.
We conduct our corporate operations from leased facilities under operating leases. Generally, these have initial
lease periods of three to twelve years and contain provisions for renewal options of five years at market rates. We
account for rent expense on a straight-line basis over the term of the lease. The following table summarizes our
outstanding contractual obligations at December 31, 2010.
Payments Due In
Total
Less Than
1 Year 1-3 Years 3-5 Years
More Than
5 Years
(Dollars in millions)
Operating leases ............................. $22.3 $ 4.8 $ 9.3 $ 7.5 $ 0.7
Royalty guarantees ........................... 13.3 11.9 1.4 — —
Total .................................. $35.6 $16.7 $10.7 $ 7.5 $ 0.7
At December 31, 2010, we had no outstanding borrowings or letters of credit under our asset-backed line of
credit facility with Bank of America, N.A. At December 31, 2010, we had $75.0 million of potential availability
on the line. In addition, we had commitments to purchase inventory totaling approximately $36.1 million at
December 31, 2010.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our financial statements and accompanying notes are prepared in accordance with GAAP. Preparing financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. We believe that certain accounting policies, which we refer to as critical
36