LeapFrog 2012 Annual Report Download - page 13

meet or exceed all applicable regulatory requirements regarding safety in the design, manufacture, packaging,
and delivery into the hands of each product’s ultimate user, a child. Our quality control system processes
include product testing and verification for safety and reliability, starting in the design phase of a product’s
life cycle and continuing through production and field support. For more information about the adverse effects
that could result from possible errors or defects in our products, see Part I, Item 1A. — Risk Factors — ‘‘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 manufacturing and operations strategy is designed to maximize the use of outsourced services,
particularly with respect to the actual production and physical distribution of our products. We outsource
substantially all of our manufacturing using several Asia-based manufacturers, most of which manufacture our
products at facilities in the Guangdong province in the southeastern region of China. These manufacturers are
selected based on their technical and production capabilities and are matched to particular products to achieve
cost and quality efficiencies. We depend on these manufacturers to produce sufficient volumes of our finished
products in a timely fashion, at satisfactory cost and quality levels and in accordance with our and our
customers’ terms of engagement. Labor costs in China continue to increase due to a variety of factors. For
information on the potential business risk resulting from our reliance on contract manufacturers, see Part I,
Item 1A. — Risk Factors — ‘‘We rely on a limited number of manufacturers to produce our finished products,
and our reputation and operating results could be harmed if they fail to produce quality products in a timely
and cost-effective manner and in suffıcient quantities or if our manufacturing process is otherwise disrupted.’’
We have established subsidiaries in Hong Kong and Shenzhen, China to work closely with our contract
manufacturing service providers. These subsidiaries manage product design, the supply of raw materials, labor
and the assembly process.
Most of our products are manufactured from basic raw materials such as plastic and paper, and a majority of
our products require electronic components. These raw materials are readily available from a variety of
sources, but may be subject to significant price fluctuations. Some of the electronic components used to make
our products, including our application-specific integrated circuits (‘‘ASIC’’), currently come from single
suppliers. For information as to how this concentration of suppliers could affect our business, see Part I,
Item 1A. — Risk Factors — ‘‘Future operating results depend on the cost of our components and raw
materials and our ability to obtain these in suffıcient quantities from our suppliers or alternative sources.’’
Research and Development
We design our multimedia learning platforms and related content, learning toys, and online services using a
combination of in-house research and development (‘‘R&D’’) resources and outside consultants. Generally,
once the design phase of the product is complete, the remaining development and manufacturing of the
products are outsourced to third parties. Our total R&D expense was $36.6 million, $33.8 million and
$33.4 million in 2012, 2011 and 2010, respectively.
•Multimedia Learning Platform and Learning Toy Development: We believe that investment in
R&D is a critical factor in strengthening our product portfolio. We have assembled a team of
specialists with backgrounds in a wide variety of fields, including education, child development,
hardware engineering, software development, content development, video games and toys. We have
internally developed each of our current multimedia learning platforms using licensed technology if
warranted. For example, we use a version of Macromedia’s Flash player in our Leapster and
LeapPad multimedia learning platforms. We also use optical pattern recognition hardware and
software from Anoto AB in our Tag and Tag Junior products. We have internally developed the
majority of our learning toys.
•Content Development: Our content production department oversees development of our
interactive books, educational games, and stand-alone products, applying a pedagogical approach,
which is based on established educational standards. Much of our content uses licensed characters,
such as the Disney Princesses, Dora the Explorer, Scooby-Doo, SpongeBob SquarePants and
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