LeapFrog 2008 Annual Report Download - page 80

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
LeapFrog manufactures and sells its products primarily to national and regional mass-market retailers in the
United States. Credit is extended based on an evaluation of the customers’ financial condition; generally,
collateral is not required. Allowances for credit losses are provided for in the consolidated financial statements at
the time of sale. Three major retailers account for 66% and 62% of total accounts receivable at December 31,
2008 and 2007, respectively. Should any of the three retailers experience difficulties paying their debts to
LeapFrog, this could have a significant negative impact on the Company’s statement of operations and cash
flows.
Seasonality of Sales
Sales of LeapFrog’s products have historically been highly seasonal with a significant majority of the sales
occurring during the third and fourth quarters. Failure to accurately predict and respond to consumer demand
may cause LeapFrog to produce excess inventory, which could adversely affect operating results and financial
condition. Conversely, if a product achieves greater success than anticipated, the Company may not have
sufficient inventory to meet retail demand, which could adversely impact LeapFrog’s relations with its
customers.
Manufacturing Vendor Concentration
LeapFrog’s manufacturing and operations strategy is designed to maximize the use of outsourced services,
particularly with respect to the actual production and physical distribution of its products. The Company believes
that its outsourcing strategy enhances the scalability of the manufacturing process. Since the Company does not
have its own manufacturing facilities, it is dependent on close working relationships with its contract
manufacturers for the supply and quality of its products and the computer chips contained in these products.
LeapFrog uses contract manufacturers located in Asia, primarily in China to build its finished products. Given
the highly seasonal nature of its business, any unusual delays or quality control problems could have a material
adverse effect on LeapFrog’s operating results and financial condition. LeapFrog’s top three vendors supplied a
total of 49%, 52% and 72% of LeapFrog’s products in 2008, 2007 and 2006, respectively. In 2008, our largest
individual vendor, Askey Computer Corporation, located in China, supplied 20% of LeapFrog’s products. In
2007 and 2006, Jetta Company Limited or Jetta, located in China, supplied 24% and 51%, respectively. The
Company expects to continue to use a limited number of contract manufacturers and fabricators.
Customer Concentration
A limited number of customers historically have accounted for a substantial portion of our gross sales. For
the last three fiscal years, the Company’s top three customers have been Target, Toys “R” Us and Wal-Mart. The
relative percentage of gross sales to the top three customers to total Company sales were as follows for the three
years shown below:
Years Ending December 31,
2008 2007 2006
Wal-Mart .............................................................. 25% 21% 26%
Target ................................................................ 18% 20% 20%
Toys “R” Us ........................................................... 17% 13% 16%
Total ............................................................. 60% 54% 62%
Wal-Mart, Target and Toys “R” Us accounted for 36%, 12% and 17% of total gross accounts receivable at
December 31, 2008, respectively as compared to 33%, 12% and 17%, respectively at December 31, 2007.
F-22