LeapFrog 2012 Annual Report Download - page 22

Third parties have claimed, and may claim in the future, that we are infringing their intellectual
property rights, and we may not succeed in protecting or enforcing our intellectual property rights.
In the course of our business, we periodically receive claims of infringement or otherwise become aware of
potentially relevant patents, copyrights, trademarks or other intellectual property rights held by other parties.
Responding to any infringement claim, regardless of its validity, may be costly and time-consuming and may
divert our management and key personnel from our business operations. If we, our distributors, our licensors
or our manufacturers are found to be infringing the intellectual property rights of any third party, we or they
may be required to obtain a license to use those rights, which may not be obtainable on reasonable terms, if at
all. We also may be subject to significant damages or injunctions against the development and sale of some of
our products or against the use of a trademark or copyright in the sale of some of our products. Our insurance
does not cover all types of intellectual property claims and insurance levels for covered claims may not be
adequate to indemnify us for all the liability that could be imposed.
In addition, we rely, and plan to continue to rely, on a combination of patents, copyrights, trademarks, service
trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our
proprietary rights. Contractual arrangements and other steps we have taken to protect our intellectual property
may not prevent misappropriation of our intellectual property or deter independent third-party development of
similar technologies. The steps we have taken may not prevent unauthorized use of our intellectual property,
particularly in foreign countries where we do not hold patents or trademarks or where the laws may not
protect our intellectual property as fully as in the U.S. Some of our products and product features have limited
intellectual property protection, and, as a consequence, we may not have the legal right to prevent others from
reverse engineering or otherwise copying and using these features in competitive products. In addition,
monitoring the unauthorized use of our intellectual property is costly, and any dispute or other litigation,
regardless of outcome, may be costly and time-consuming and may divert our management and key personnel
from our business operations. However, if we fail to protect or to enforce our intellectual property rights
successfully, our rights could be diminished and our competitive position could suffer, which could harm our
operating results.
Any errors or defects contained in our products, or our failure to comply with applicable safety
standards, could result in recalls, delayed shipments, rejection of our products and damage to our
reputation, and could expose us to litigation or regulatory action.
Our products may contain errors or defects, which could result in the rejection of our products by our
retailers, damage to our reputation, lost sales, diverted development resources and increased customer service
and support costs and warranty claims. Individuals could sustain injuries from our products, and we may be
subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities may
exceed, or fall outside the scope of, our insurance coverage. Moreover, we may be unable to retain adequate
liability insurance in the future.
Concerns about potential public harm and liability may involve involuntary recalls or lead us to voluntarily
recall selected products. Recalls or post-manufacture repairs of our products could harm our reputation and
our competitive position, increase our costs or reduce our net sales. Costs related to unexpected defects
include the costs of writing down the value of our inventory of defective products and providing product
replacement, as well as the cost of defending against litigation related to the defective products. Further, as a
result of recent recalls and safety issues related to products of a number of manufacturers in the toy industry,
some of our retail customers have been increasing their testing requirements of the products we ship to them.
These additional requirements may result in delayed or cancelled shipments, increased logistics and quality
assurance costs, or both, which could adversely affect our operations and financial results. In addition, recalls
or post-manufacturing repairs by other companies in our industry could affect consumer behavior and cause
reduced purchases of our products and increase our quality assurance costs in allaying consumer concerns.
Our liquidity may be insufficient to meet the long-term or periodic needs of our business.
In addition to cash received from the collection of accounts receivable, from time to time, we may fund our
operations and strengthen our liquidity through borrowings under our line of credit. Our line of credit has
numerous financial tests and covenants that affect the amount we can borrow, and includes various events of
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