LeapFrog 2007 Annual Report Download - page 28

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.
Recently, there have been product quality issues for other producers of toys and other companies who
manufacture goods in China. We outsource substantially all of our finished goods assembly, using several Asian
manufacturers, most of which 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, or if any of our products are found to be tainted or otherwise raise health or
safety concerns, 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.
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 public harm and liability may lead us to voluntarily recall selected products. Recalls or
post-manufacture repairs of our products could harm our reputation and our competitive position, increase our
costs or reduce our net sales. Costs related to unexpected defects include the costs of writing down the value of
inventory of defective products and providing product replacement as well as the cost of defending against
litigation related to the defective products. Further, as a result of recent recalls and safety issues related to
products of a number of manufacturers in the toy industry, some of our retailer customers have been increasing
their testing requirements of the products we ship to them. These additional requirements may result in delayed
or cancelled shipments, increased logistics and quality assurance costs, or both, which could adversely affect our
operations and business results. In addition, recalls or post-manufacturing repairs by other companies in our
industry could affect consumer behavior and cause reduced purchases of our products and increase our quality
assurance costs in allaying consumer concerns.
We depend on key personnel, and we may not be able to hire, retain and integrate sufficient qualified
personnel to maintain and expand our business.
Our future success depends partly on the continued contribution of our key executives and technical, sales,
marketing, manufacturing and administrative personnel. In 2007, we hired new executives in international sales,
product innovation and marketing, and accounting and added substantially to our web services and web products
teams. In addition to hiring new management personnel, we have experienced significant turnover in our
management positions. If our new leaders are unable to properly integrate into the business or if we are unable to
retain or replace key personnel or functional capabilities on a timely basis or at all, our business will be adversely
affected.
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