LeapFrog 2003 Annual Report Download - page 84

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
There was no outstanding balance at December 31, 2003 and 2002. At December 31, 2003 and 2002, the
Company had outstanding letters of credit of $300 and $1,350, respectively. At December 31, 2003, $29,700 of
unused borrowings were available to the Company.
12. License Agreements
The Company licenses certain of its content from third parties under exclusive and nonexclusive
agreements, which permit the Company to utilize characters, stories, illustrations and/or trade names throughout
specified geographic territories. The total amount of royalty expense related to these license agreements was
$12,628, $6,463 and $1,223 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company
had $7,290 and $3,949 in accrued royalties at December 31, 2003 and 2002, respectively. See Note 21
(Commitments and Contingencies).
13. Concentrations of Credit Risk and Certain Other Risks
Financial instruments that subject the Company to concentrations of credit risk include cash equivalents,
short-term investments and trade receivables. Cash and cash equivalents consist principally of cash, money
market funds, short-term fixed income municipal securities. Short-term investments consist principally of fixed
income municipal securities` and auction preferred securities. These instruments are short-term in nature and
bear minimal risk. To date, the Company has not experienced any material losses on cash equivalents or short-
term investments.
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 48%, 58% and 53% of the
Company’s products in 2003, 2002 and 2001, respectively; Jetta Company Limited, located in China, supplied
32%, 45% and 35%, respectively.
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