LeapFrog 2008 Annual Report Download - page 15

enabling us to compare favorably with many of our current competitors on some or all of these toy factors. As
our competitors in the reading solutions and learning toys categories seek competitive advantages and
differentiation, they are making larger investments in product research and development and advertising,
focusing on global product launches and key distribution channels, expansion of retail shelf space and expansion
of products sold through the web. Our principal competitors in the reading solutions and learning toy categories
have included Mattel, Inc., primarily under its Fisher-Price brand, Hasbro, Inc. and its Playskool division, and
Vtech Holdings Ltd.
Our products must also compete for leisure time of children and discretionary spending of parents with other
forms of media and entertainment. We design our products to bring fun to learning in order to compete favorably
with these outside competitive influences. We believe that the educational content and innovation in our products
allows us to compete favorably in these categories as well.
As we pursue our strategies, we increasingly face a broader competitive arena with a variety of products
including computer products, electronic and online games and entertainment gaming systems. Products in our
educational gaming category, such as our Leapster platform and related software, compete against handheld and
console-based gaming platforms from Sony, Microsoft, and Nintendo and against games and other software
produced for these platforms. Online gaming and learning is also increasingly becoming a factor in our
competitive environment.
Manufacturing
As is the case with most toy manufacturers and many consumer electronics companies, most of our products
are manufactured in China. While China has legislated national standards intended to control the use of lead-
based paint, particularly in toys, we actively manage our supplier base, mandating compliance with local and
international safety inspections and reinforcing our product standards, which require meeting or exceeding all
applicable regulatory requirements regarding safety in the design, manufacture, packaging, and delivery into the
hands of each product’s ultimate customer, a child.
Our manufacturing and operations strategy is designed to maximize the use of outsourced services
particularly with respect to the actual production and physical distribution of our products. In order to work
closely with our manufacturing service providers, we have established subsidiaries in Hong Kong and Shenzhen,
China. We manage our outsourced manufacturing by allowing LeapFrog’s engineering resources to focus on the
product design and manufacturability while our contract manufacturers manage the supply of raw materials,
labor and the assembly process. Most of our products are manufactured from basic raw materials such as plastic
and paper, and the majority of our products require electronic components. These raw materials are readily
available from a variety of sources, but may be subject to significant fluctuations in price. Some of our electronic
components used to make our products, including our application-specific integrated circuits, or ASICs, currently
come from single suppliers. We do not have long-term agreements with any suppliers. If our suppliers were
unable to meet our demand for components and raw materials, and if no alternative sources were available at a
reasonable cost, or available at all, our ability to produce our products on a timely and cost-effective basis would
be impaired. For information as to how this concentration of suppliers could affect our business, see Part I, Item
1A.—Risk Factors—“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.”
We use contract manufacturers located in Asia, primarily in China, to build all of our finished products.
These suppliers are selected based on their technical and production capabilities and are matched to particular
products to achieve cost and quality efficiencies. For information as to how this concentration of manufacturing
could affect our business, see Part I, Item 1A.—Risk Factors—“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.”
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