LeapFrog 2006 Annual Report Download - page 25

We depend on our suppliers for our components and raw materials, and our production or operating
margins would be 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 application-specific integrated circuits, or
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 raw materials 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. In addition, as we do not have long-term agreements with our major suppliers,
they may stop manufacturing our components at any time.
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 and cost-effective manner and in sufficient quantities.
We outsource substantially all of our finished goods assembly, using several Asian manufacturers, most of
who manufacture our products at facilities in the Guangdong province in the southeastern region of China. We
depend on these manufacturers to produce sufficient volumes of our finished products in a timely fashion, at
satisfactory quality and cost levels and in accordance with our and our customers’ terms of engagement. If our
manufacturers fail to produce quality finished products on time, at expected cost targets and in sufficient
quantities, our reputation and operating results would suffer. In addition, as we do not have long-term agreements
with our manufacturers, they may stop manufacturing for us at any time, with little or no notice. We may be
unable to manufacture sufficient quantities of our finished products and our business and operating results could
be harmed.
Increases in our component or manufacturing costs could reduce our gross margins.
Cost increases for our components or manufacturing services, whether resulting from shortages of materials,
labor or otherwise, including, but not limited to rising cost of materials, transportation services, labor, commodity
price increases and the impact of foreign currency fluctuations could negatively impact our gross margins.
Because of market condition and other factors, we may not be able to offset any such increased costs by adjusting
the price of our products.
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
our reputation, lost sales, diverted development resources and increased customer service and support costs and
warranty claims, any of which could harm our business. Individuals could sustain injuries from our products, and
we may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities
may exceed, or fall outside the scope of, our insurance coverage. Moreover, we may be unable to retain adequate
liability insurance in the future. We are subject to the Federal Hazardous Substances Act, the Flammable Fabrics
Act, regulation by the Consumer Product Safety Commission, or CPSC, and other similar federal, state and
international rules and regulatory authorities. Our products could be subject to involuntary recalls and other
actions by such authorities. Concerns about potential liability may lead us to recall voluntarily selected products.
Recalls or post-manufacture repairs of our products could harm our reputation, increase our costs or reduce our
net sales.
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