LeapFrog 2010 Annual Report Download - page 25

shipping schedules, we could damage our relationships with retailers, increase our shipping costs or cause sales
opportunities to be delayed or lost. In order to be able to deliver our merchandise on a timely basis, we need to
maintain adequate inventory levels of the desired products. If our inventory forecasting and production planning
processes result in our maintaining manufacturing inventory in excess of the levels demanded by our customers,
as occurred in the fourth quarter of 2010, we could be required to record inventory write-downs for excess and
obsolete inventory, which would adversely affect our operating results. If the inventory of our products held by
retailers is too high, they may not place or may reduce orders for additional products, which would unfavorably
impact our future sales and adversely affect our operating results. For example, the high inventory level at the
end of 2008 adversely impacted our 2009 net sales, particularly during the first three quarter, which were 40%
lower than the same period of 2008. Similarly, the high inventory level as of December 31, 2010 may adversely
impact our net sales in the first several quarters in 2011.
If we are unable to compete effectively with existing or new competitors, our sales and market share could
decline.
We currently compete primarily in the learning toy and electronic learning aids category of the U.S. toy industry
and, to some degree, in the overall U.S. and international toy industry. We believe we compete to some extent,
and may increasingly compete in the future, with makers of popular game platforms, electronic entertainment
devices and smart mobile devices. We also compete in the U.S. supplemental educational materials market. Each
of these markets is very competitive and we expect competition to increase in the future. Many of our direct,
indirect and potential competitors have significantly longer operating histories, greater brand recognition and
substantially greater financial, technical and marketing resources than we do. These competitors may be able to
respond more rapidly than we can to changes in consumer requirements or preferences or to new or emerging
technologies, and may be able to use their economies of scale to produce products more cheaply. Further, with
greater economies 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.
Our intellectual property rights include licenses from third parties and may not prevent other companies
from using our technologies or similar technologies to develop competing products, which could weaken
our competitive position and harm our operating results.
Our success depends in large part on our proprietary technologies that are used in our learning platforms and related
software. We rely, and plan to continue to rely, on a combination of patents, copyrights, trademarks, service
trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our
proprietary rights. Among our rights are inbound licenses from third parties for content, such as characters, stories,
illustrations and trade names, and for technologies we incorporate in our products including key technology used in
our Tag and Tag Junior reading systems. Our continued use of these rights is dependent on our ability to continue to
obtain these license rights and at reasonable rates. Any failure to do so could interrupt our supply chain and require
us to modify our products or business plans. In addition, the contractual arrangements and the other steps we have
taken to protect our intellectual property may not prevent misappropriation of our intellectual property or deter
independent third-party development of similar technologies. The steps we have taken may not prevent
unauthorized use of our intellectual property, particularly in foreign countries where we do not hold patents or
trademarks or where the laws may not protect our intellectual property as fully as in the United States. Some of our
products and product features have limited intellectual property protection, and, as a consequence, we may not have
the legal right to prevent others from reverse engineering or otherwise copying and using these features in
competitive products. In addition, monitoring the unauthorized use of our intellectual property is costly, and any
dispute or other litigation, regardless of outcome, may be costly and time-consuming and may divert our
management and key personnel from our business operations. However, if we fail to protect or to enforce our
intellectual property rights successfully, our rights could be diminished and our competitive position could suffer,
which could harm our operating results.
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