LeapFrog 2010 Annual Report Download - page 16

products, including our application-specific integrated circuits (“ASIC”), currently come from single suppliers.
We generally do not have long-term agreements with any suppliers. In addition, some of our suppliers are
companies with relatively short operating histories and we cannot be sure of their long-term financial
viability. For example, in 2010, a sole-source supplier of an ASIC for one of our interactive reading systems
informed us that it was having financial difficulties which required us to negotiate the purchase of certain
intangible assets from the supplier in order to continue production of the ASIC. If, for any reason, we were
unable to make alternative arrangements, it is possible that we would have to re-design the relevant ASIC or
other component and obtain it from alternative sources, which could cause delays in our ability to manufacture
the relevant product or products. 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.”
In 2006, we implemented a world-wide quality system that supports the European Risk of Hazardous Substances
directive, which banned certain substances, such as lead and mercury, in the production of consumer products. In
addition, we monitor compliance with standards set by the United States Consumer Product Safety Commission
(“CPSC”) and the International Council of Toy Industries.
We are subject to the Consumer Product Safety Act of 1972, as amended in August 2008 by the Consumer
Product Safety Improvement Act (“CPSIA”), the Federal Hazardous Substances Act, the Flammable Fabrics Act,
regulation by the CPSC, and other similar federal, state and international rules and regulatory authorities. While
we believe we are currently in compliance with the CPSIA standards for lead and other substances, additional
requirements under the CPSIA may become effective during 2011. Any unanticipated failure to comply with
those upcoming requirements could lead to products returns or inventory write-offs. For more information about
the adverse effects that could result from possible errors or defects in our products, see Part I, Item 1A.—Risk
Factors—“Any errors or defects contained in our products, or our failure to comply with applicable safety
standards, could result in recalls, delayed shipments, rejection of our products and damage to our reputation,
and could expose us to regulatory or other legal action.”
Our quality control system processes include product testing and verification for safety and reliability, starting in
the design phase of a product’s life cycle and continuing through production and field support. Our testing for
safety is generally more frequent than standards require, and focused testing for special areas of interest, such as
chemical compliance controls is undertaken even more frequently. We set standards for supplier performance
and we make routine assessments of and take steps to verify compliance with our quality standards. We
communicate those expectations to our suppliers regularly and work with them to sustain the process of
consistently producing safe products. We work with a relatively small group of contract manufacturers, some of
which are specialized for the consumer electronics manufacturing sector.
Research and Development
We design our hardware platforms and related software-based content using in-house research and development
resources and outside consultants as necessary. Generally, once the design phase of the product is complete, the
remaining development and manufacturing of the products are outsourced to third parties. Our total research and
development (“R&D”) expense was $35.1 million, $35.0 million and $48.5 million in 2010, 2009 and 2008,
respectively.
•Hardware and Software Development: We believe that investment in research and development is a
critical factor in strengthening our portfolio of products. We have assembled a team of specialists with
backgrounds in a wide variety of fields, including education, child development, hardware engineering,
software development, video games and toys. We have internally developed each of our current
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