LeapFrog 2005 Annual Report Download - page 97

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Prior to the fourth quarter of 2005, the Company sourced and provided, on consignment, some of the
components used in the product. During the fourth quarter, the Company began its transition to a turnkey mode
of operations, whereby contract manufacturers will manage the supply of raw materials into the manufacturing
process. Pursuant to its revised sourcing agreements, the Company sold at book value approximately $30 million
of raw material inventory to third party contract manufacturers during the fourth quarter of 2005. Amounts due
from contract manufacturers are included in accounts receivable at December 31, 2005. These “turnkey”
operations provide a more effective supply chain process by allowing the Company’s engineering resources to
focus on the product design and manufacturability while the Company’s contract manufacturers manage the
supply of raw materials into the process. This approach also provides clear task ownership and facilitates
coordination of up stream suppliers with a single point of contact. In addition, these contract manufacturers, who
provide similar services to other companies, can source the raw materials more cost-effectively.
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,
2005 2004 2003
Wal-Mart ........................................................ 29% 28% 31%
Toys “R” Us ...................................................... 20% 23% 25%
Target ........................................................... 15% 13% 12%
Total ........................................................ 64% 64% 68%
Wal-Mart, Toys “R” Us and Target accounted for approximately 37%, 23% and 22%, respectively, of gross
accounts receivable at December 31, 2005. At December 31, 2004, Wal-Mart, Toys “R” Us and Target accounted
for approximately 30%, 32% and 14%, respectively, of gross accounts receivable.
14. Income Taxes
Income (loss) before taxes includes the following components:
Year Ended
December 31,
2005 2004 2003
Income (loss) before taxes:
United States .......................................... $(1,297) $(13,514) $110,586
Foreign .............................................. 25,094 1,057 4,709
Total ............................................ $23,797 $(12,457) $115,295
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