LeapFrog 2002 Annual Report Download - page 24

contract manufacturers located in mainland China to build our finished products, which are selected based on
their technical and production capabilities and are matched to particular products to achieve cost and quality
efficiencies. We have our own quality assurance employees on site at each of our contract manufacturers. During
the years from 2000 to 2002, Jetta Company Limited, one of our manufacturers in China, supplied 37%, 35% and
45% of our products, respectively, and our top three manufacturers combined supplied a total of 62%, 53% and
58% of our products, respectively. Jetta is currently the sole manufacturer of our LeapPad platforms and some of
our other products. For information as to how this concentration of manufacturing could affect our business, see
“ Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors That
May Affect Our Results and Stock Price — We rely on a limited number of manufacturers, virtually all of which
are located in China, to produce our finished products, and our reputation and operating results could be harmed
if they fail to produce quality products in a timely manner and in sufficient quantities.”
Based on our net sales in 2002, customers took title to approximately one-third of our products directly from
our manufacturing facilities in China. However, the majority of our products are shipped directly to our contract
warehouse in Ontario, California and are later shipped to meet the demands of our major U.S. retailers and other
smaller retailers and distributors throughout the United States. In May 2002, we began using a contract
warehouse in Chino, California, primarily for promotional assembly and shipments to our SchoolHouse
customers.
As of December 31, 2002, we had 116 employees devoted to manufacturing, logistics and operations.
Information Technology
We use Oracle database software and our internal information technology infrastructure to manage our
product development efforts and our financial, inventory, customer and sales data. These systems are designed to
allow us to communicate electronically with our customers for the automated processing of customer orders and
receipt of point-of-sale data, and with our third-party warehouse operations to increase service levels for our
customers and provide a virtual, real-time view of our supply chain.
Customer Service
We believe that our ability to establish and maintain long-term relationships with consumers and retailers
depends, in part, on the strength of our customer support and service operations. We encourage and utilize
frequent communication with and feedback from our customers and retailers to continually improve our products
and service. Our customer service center operates 24 hours a day, 7 days a week during peak periods, specifically
from November through January, and 14 hours on weekdays, and 9 hours on Saturdays during off-peak periods.
We offer toll-free telephone support for consumers and retailers who prefer to talk directly with a customer
service representative. We also respond to email inquiries received through our website. As of December 31,
2002, we had 10 in-house customer service representatives who oversee and coordinate our customer service
activities with our third-party customer service provider. In addition, on our website, we have a knowledge
resource link that directs consumers to a frequently asked questions section, which we update as we receive
consumer feedback. We also have a dedicated retail sales service team. This team, which included 20 employees
as of December 31, 2002, works with our top retailers and provides point-of-sale related analysis for better
forecasting and inventory plans. Our service operations are based in our Emeryville, California facility.
Competition
We compete primarily in the infant and toddler category, preschool category and the electronic learning aids
category of the U.S. toy industry and, to some degree, in the overall U.S. and international toy industries. We
believe the principal competitive factors impacting the market for our products in retail stores are brand, design,
features, educational soundness, quality and price. We believe that we compare favorably with many of our
current competitors with respect to some or all of these factors. Our current principal competitors in the toy
industry compete in the preschool category and include Hasbro, Inc., Mattel, Inc. and VTech Corporation. In
February 2003, Mattel announced a product under the name “PowerTouch” having functionality similar to that of
19