LeapFrog 2008 Annual Report Download - page 26

of scale and more distribution channels, they may be successful even if they sell at a lower margin. Our larger
competitors may also be able to devote substantially greater resources, including personnel, spending and facilities
to the development, promotion and sale of their products than we do. We cannot assure you that we will be able to
compete effectively in our markets.
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. If we are required to use alternative
sources, we may be required to redesign some aspects of the affected products, which may involve delays and
additional expense.
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 that
manufacture goods in China. In addition, there have been concerns about foreign exchange rates and rising labor
and energy costs related to doing business 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
or we may be unable to manufacture them at targeted cost levels, and our business and operating results could be
harmed.
Our international business may not succeed and subjects us to risks associated with international
operations.
We derived approximately 21% and 23% of our net sales from markets outside the United States during
2008 and 2007, respectively. Our efforts to increase sales for our products outside the United States may not be
successful and may not achieve higher sales or gross margins or contribute to profitability.
Our business is, and will increasingly be, subject to risks associated with conducting business
internationally, including:
• developing successful products that appeal to the international markets;
• difficulties managing and maintaining relationships with vendors, customers, distributors and other
commercial partners;
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