LeapFrog 2003 Annual Report Download - page 55

We do not have long-term agreements with our major suppliers, and they may stop manufacturing our
components at any time.
We presently order our products on a purchase order basis from our 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 suppliers could refuse to manufacture some or all of our components, reduce the
number of units of a component that they will manufacture or change the terms under which they manufacture
our components. If our suppliers stop manufacturing our components, we may be unable to find alternative
suppliers on a timely or cost-effective basis, if at all, which would harm our operating results. In addition, if any
of our suppliers changes the terms under which they manufacture for us, our costs could increase and our
profitability would suffer.
We depend on our suppliers for our components, and our production would be seriously harmed if these
suppliers are not able to meet our demand and alternative sources are not available.
Some of the components used to make our products, including our ASICs, currently come from a single
supplier. Additionally, the demand for some components such as liquid crystal displays, integrated circuits or
other electronic components is volatile, which may lead to shortages. If our suppliers are unable to meet our
demand for our components and if we are unable to obtain an alternative source or if the price available from our
current suppliers or an alternative source is prohibitive, our ability to maintain timely and cost-effective
production of our products would be seriously harmed and our operating results would suffer.
If we do not correctly anticipate demand for particular products, we could incur additional costs or
experience manufacturing delays, which would reduce our gross margins or cause us to lose sales.
Historically, we have seen steady increases in demand for our products and have generally been able to
increase production to meet that demand. However, the demand for our products depends on many factors such
as consumer preferences, including children’s preferences, and the introduction or adoption of new hardware
platforms for interactive educational products, and can be difficult to forecast. We expect that it will become
more difficult to forecast demand for specific products as we introduce and support additional products, enter
additional markets and as competition in our markets intensifies. If we misjudge the demand for our products, we
could face the following problems in our operations, each of which could harm our operating results:
•Ifour forecasts of demand are too high, we may accumulate excess inventories of components and
finished products, which could lead to markdown allowances or write-offs affecting some or all of such
excess inventories. We may also have to adjust the prices of our existing products to reduce such excess
inventories.
•Ifdemand for specific products increases beyond what we forecast, our suppliers and third-party
manufacturers may not be able to increase production rapidly enough to meet the demand. Our failure to
meet market demand would lead to missed opportunities to increase our base of users, damage our
relationships with retailers and harm our business.
•Rapid increases in production levels to meet unanticipated demand could result in increased
manufacturing errors, as well as higher component, manufacturing and shipping costs, all of which
could reduce our profit margins and harm our relationships with retailers and consumers.
Any errors or defects contained in our products, or our failure to comply with applicable safety standards,
could result in delayed shipments or rejection of our products, damage to our reputation and expose us to
regulatory or other legal action.
We have experienced, and in the future may experience, delays in releasing some models and versions of
our products due to defects or errors in our products. Our products may contain errors or defects after
commercial shipments have begun, which could result in the rejection of our products by our retailers, damage to
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PART II