LeapFrog 2002 Annual Report Download - page 56

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If we are unable to compete effectively with existing or new competitors, our sales and market share could
decline.
We currently compete primarily in the infant and toddler and preschool categories and electronic learning
aids category of the U.S. toy industry and, to some degree, in the overall U.S. and international toy industry. Our
SchoolHouse division competes in the supplemental educational materials market. Each of these markets is very
competitive and we expect competition to increase in the future. For example, Mattel, Inc. will be introducing in
2003 a product under the name “Power Touch” having functionality similar to that of our LeapPad platform
under Mattel’s Fisher-Price brand. We believe that we are beginning to compete, and will increasingly compete
in the future, with makers of popular game platforms and smart mobile devices such as personal digital
assistants. These companies are well situated to compete effectively in our primary markets. Additionally, we are
beginning to cross over into their markets with products such as our iQuest handheld device. Many of our direct,
indirect and potential competitors have significantly longer operating histories, greater brand recognition and
substantially greater financial, technical and marketing resources than we do. These competitors may be able to
respond more rapidly than we can to changes in consumer requirements or preferences or to new or emerging
technologies. They may also devote greater resources to the development, promotion and sale of their products
than we do. We cannot assure you that we will be able to compete effectively in our markets.
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.
We outsource substantially all of our finished goods manufacturing to seven manufacturers, all of whom
manufacture our products at facilities in the Guandong province in the southeastern region of China. For
example, Jetta Company Limited was the sole manufacturer of all our LeapPad platforms in 2002. We depend on
these manufacturers to produce sufficient volumes of our products in a timely fashion and at satisfactory quality
levels. We generally allow retailers and distributors to return or receive credit for defective or damaged products.
If our manufacturers fail to produce quality products on time and in sufficient quantities due to capital shortages,
late payments from us, political instability, labor shortages, intellectual property disputes, natural disasters,
energy shortages, terrorism or other disruptions to their businesses, our reputation and operating results would
suffer. In addition, if our manufacturers decide to increase production for their other customers, they may be
unable to manufacture sufficient quantities of our products and our business could be harmed.
We do not have long-term agreements with our manufacturers and suppliers, and they may stop
manufacturing our products or components at any time.
We presently order our products on a purchase order basis from our manufacturers and component
suppliers, and we do not have long-term manufacturing agreements with any of them. The absence of long-term
agreements means that, with little or no notice, our manufacturers and suppliers could refuse to manufacture
some or all of our products or components, reduce the number of units of a product or component that they will
manufacture or change the terms under which they manufacture our products or components. If our
manufacturers and suppliers stop manufacturing our products or components, we may be unable to find
alternative manufacturers or suppliers on a timely or cost-effective basis, if at all, which would harm our
operating results. In addition, if any of our manufacturers or suppliers changes the terms under which they
manufacture for us, our costs could increase and our profitability would suffer.
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