LeapFrog 2007 Annual Report Download - page 27

We do not have long-term agreements with any of our retailers. As a result, agreements with respect to
pricing, shelf space, cooperative advertising or special promotions, among other things, are subject to periodic
negotiation with each retailer. Retailers make no binding long-term commitments to us regarding purchase
volumes and make all purchases by delivering one-time purchase orders. If any of these retailers reduce their
purchases from us, change the terms on which we conduct business with them or experience a future downturn in
their business, our business and operating results could be harmed.
Our business is seasonal, and therefore our annual operating results depend, in large part, on sales
relating to the brief holiday season.
Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing the
substantial majority of our sales to retailers to occur during the third and fourth quarters. In 2007, approximately
74% of our total net sales occurred during the second half of the year. This percentage of total sales may increase
as retailers become more efficient in their control of inventory levels through just-in-time inventory management
systems. Generally, retailers time their orders so that suppliers like us will fill the orders closer to the time of
purchase by consumers, thereby reducing their need to maintain larger on-hand inventories throughout the year to
meet demand.
Failure to predict accurately and respond appropriately to retailer and consumer demand on a timely basis to
meet seasonal fluctuations, or any disruption of consumer buying habits during this key period, would harm our
business and operating results. We expect we will incur losses in the first and second quarters of each year for the
foreseeable future.
If we do not maintain sufficient inventory levels or if we are unable to deliver our products to our
customers in sufficient quantities, or on a timely basis, or if our retailers’ inventory levels are too high, our
operating results will be adversely affected.
The high degree of seasonality of our business places stringent demands on our inventory forecasting and
production planning processes. If we fail to meet tight shipping schedules, we could damage our relationships
with retailers, increase our shipping costs or cause sales opportunities to be delayed or lost. In order to be able to
deliver our merchandise on a timely basis, we need to maintain adequate inventory levels of the desired products.
If our inventory forecasting and production planning processes result in our manufacturing inventory in excess of
the levels demanded by our customers, we could be required to record inventory write-downs for excess and
obsolete inventory, which would adversely affect our operating results. If the inventory of our products held by
our retailers is too high, they may not place or may reduce orders for additional products, which would
unfavorably impact our future sales and adversely affect our operating results.
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 single suppliers. 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.
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