LeapFrog 2002 Annual Report Download - page 53

accounts receivable and Toys “R” Us accounted for approximately 30% of our accounts receivable. If any of
these retailers experience significant financial difficulty in the future or otherwise fail to satisfy their accounts
payable, our allowance for doubtful accounts receivable could be insufficient. If any of these retailers reduce
their purchases from us, change the terms on which we conduct business with them or experience a future
downturn in their business, our business and operating results could be harmed.
Our products are shipped from China and any disruption of shipping could harm our business.
We rely on four contract ocean carriers to ship virtually all of the products that we import to our primary
distribution centers in California. Retailers that take delivery of our products in China rely on a variety of carriers
to import those products. Any disruption or slowdown of service on importation of products caused by labor
strikes, other labor disputes, terrorism, international incidents, lack of available shipping containers or otherwise
could significantly harm our business and reputation. For example, in 2002, a key collective bargaining
agreement between the Pacific Maritime Association and the International Longshore and Warehouse Union
affecting shipping of products to the Western United States, including our products, expired on September 1,
2002 and, after a temporary extension, resulted in an eleven-day cessation of work at West Coast docks. This
cessation of work cost us approximately $3.0 million in additional freight expenses. Although the Pacific
Maritime Association and International Longshore and Warehouse Union have entered into a new collective
bargaining agreement, any further disruption or slowdown of service on importation of products caused by labor
disputes, terrorism, international incidents, lack of available shipping containers or otherwise could significantly
harm our business and reputation.
We do not have long-term agreements with our retailers and changes in our relationships with retailers
could significantly harm our business and operating results.
We do not have long-term agreements with any of our retailers. As a result, agreements with respect to
pricing, shelf space, cooperative advertising or special promotions, among other things, are subject to periodic
negotiation with each retailer. Retailers make no binding long-term commitments to us regarding purchase
volumes and make all purchases by delivering one-time purchase orders. If the number of our products increases
as we have planned or the roll out of versions of our Learning Center shelf displays in selected retail stores
proceeds as we anticipate, we will require more retail shelf space to display our various products. Any retailer
could reduce its overall purchases of our products, the number and variety of our products that it carries and the
shelf space allotted for our products, decide not to incorporate versions of our Learning Center shelf displays in
its stores or otherwise materially change the terms of our current relationship at any time. Any such change could
significantly harm our business and operating results.
Our limited operating history makes it difficult to evaluate our current business and prospects.
Our business began in 1995 and we have a limited operating history for you or our management to use in
evaluating our business and prospects, particularly with regard to our Education and Training segment, which
includes our SchoolHouse division, our International segment and our direct sales of content to consumers. To
date, we have recognized limited sales from our Education and Training and International segments and from our
direct-to-consumer content sales, and any growth in sales from these operations may not meet our expectations or
those of analysts or investors. When making an investment decision regarding our Class A common stock, you
must consider our business and prospects in light of the risks and difficulties typically encountered by companies
in their early stages of development.
Our future growth will depend in part on our SchoolHouse division, which may not be successful.
We launched our SchoolHouse division in June 1999, and to date the division, which is accounted for under
our Education and Training segment, has generated limited sales and has incurred substantial losses. We expect
the division to continue to incur substantial losses for the foreseeable future. Sales from our SchoolHouse
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