LeapFrog 2002 Annual Report Download - page 87

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LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except share, per share and percent data)
12. Concentrations of Credit Risk and Certain Other Risks
Financial instruments that subject the Company to concentrations of credit risk include cash equivalents and
trade receivables. Cash equivalents consist principally of short-term money market funds. These instruments are
short-term in nature and bear minimal risk. To date, the Company has not experienced any material losses on
cash equivalents.
The Company manufactures and sells its products primarily to national and regional mass-market retailers in
the United States. Credit is extended based on an evaluation of the customers’ financial condition, and generally
collateral is not required. However, letters of credit are sometimes requested. Credit losses are provided for in the
consolidated financial statements as are the related reserves.
Seasonality of Sales
Sales of the Company’s products have historically been highly seasonal with a significant majority of the
sales occurring during the third and fourth quarters. Failure to accurately predict and respond to consumer
demand may cause the Company to produce excess inventory, which could adversely affect the Company’s
operating results and financial condition. Conversely, if a product achieves greater success than anticipated, the
Company may not have sufficient inventory to meet retail demand, which could adversely impact the Company’s
relations with its customers.
Off-Shore Manufacturing
Since the Company does not have its own manufacturing facilities, it is dependent on close working
relationships with its contract manufacturers for the supply and quality of its products and the computer chips
contained in these products. The Company expects to continue to use a limited number of contract manufacturers
and fabricators, most of which are located in China, and, accordingly, will continue to be highly dependent upon
sources outside the Company for timely production. Given the highly seasonal nature of the Company’s business,
any unusual delays or quality control problems could have a material adverse effect on the Company’s operating
results and financial condition. The Company’s top three vendors supplied a total of 58%, 53% and 62% of the
Company’s products in 2002, 2001 and 2000, respectively; Jetta Company Limited, located in China, supplied
45%, 35% and 37%, respectively.
Customer Concentration
A limited number of customers historically have accounted for a substantial portion of the Company’s net
sales. The significant customers and the relative percentage of net sales for these customers are approximately as
follows:
Year ended December 31,
2002 2001 2000
Wal-Mart (including Sam’s Club) .......................... 30% 30% 19%
Toys “R” Us ........................................... 28 28 33
Target ................................................ 11 10 9
Kmart ................................................ 6 10 12
Total ............................................. 75% 78% 73%
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