LeapFrog 2010 Annual Report Download - page 23

spending (especially on discretionary items), lower consumer confidence, continued high or higher levels of
unemployment, higher inflation or even deflation, higher commodity prices, such as the price of oil, political
conditions, natural disaster, labor strikes or other factors could negatively impact our sales and would adversely
affect our financial results for 2011 and beyond.
Our business is highly seasonal, and our annual operating results depend, in large part, on sales relating to
the brief holiday season.
Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing a substantial
majority of our sales to retailers to occur during the third and fourth quarters. Even though we achieved net
income for the fiscal year ended December 31, 2010, we incurred losses in the first and second quarters of 2010.
Approximately 76%, 79% and 72% of our total net sales occurred during the second half of fiscal years 2010,
2009 and 2008, respectively. The percentage of total net sales in the second half of the year may increase as
retailers become more efficient in their control of inventory levels through just-in-time inventory management
systems, particularly as they remain cautious about over-ordering products prior to the holiday season. Generally,
retailers time their orders so that suppliers will fill the orders closer to the time of purchase by consumers,
thereby reducing their need to maintain larger on-hand inventories throughout the year to meet demand. If a
decline in the economy, or other factors, lead to a decline of net sales in the third or fourth quarter in particular, it
can have a disproportionate negative impact on our results for the year. In addition, soft consumer sales in the
holiday season can lead to ongoing weakness in sales to retailers well into the following year. After a strong start
to the 2010 holiday season, many retailers, including our online store, leapfrog.com, experienced a decrease in
demand late in the quarter relative to expectations. If this decrease in demand leads to ongoing weakness into
2011, it could adversely affect our financial results. Failure to predict accurately and respond appropriately to
retailer and consumer demand on a timely basis to meet seasonal fluctuations, or any disruption of consumer
buying habits during this key period (as demonstrated during and after the recent economic crisis) would harm
our business and operating results.
The unexpected loss of members of our executive management team or other key employees could
adversely affect our business.
We had a number of changes to our executive management team during 2010. Transition associated with such
changes has required, and may continue to require, significant management attention and consumption of time
and resources, potentially having an adverse effect on our business. Furthermore, we cannot provide any
assurances that we will retain our management and other key employees. Competition for high caliber personnel
is strong in our area and industry. The unexpected loss of services of members of our executive management
team or other key employees could have an adverse effect on our business. If we are unable to retain key
personnel, then it may be difficult for us to maintain a competitive position within our industry or implement our
strategic priorities.
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 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 and
cannot guarantee their stability, they may stop manufacturing our components at any time, with little or no
notice. For example, in 2009, we learned that one of our sole-source suppliers of ASICs for one of our mobile
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