LeapFrog 2011 Annual Report Download - page 17

Distribution
Our customers generally fit into one of the following categories:
•Retailers that resell our products to consumers, through their retail stores and their own online
channels, in the U.S. and some international regions;
•Distributors that purchase our products for resale to retailers, generally internationally, and also to
U.S. schools and school districts as education market resellers; and
•Direct consumers who purchase our products via our website, leapfrog.com and our LeapFrog
App Center.
Retailers and distributors purchase our products in advance, for pickup from our manufacturers in Asia, or
through orders placed to our regional warehouses where we maintain inventories to meet expected short-term
demand. Products are generally shipped through free-on-board terms. Customers pay through pre-established
letters of credit or upon payment terms, which are usually based on the date of shipment. Generally, we do
not provide rights of return or extended payment terms to our customers, except for industry standard terms
surrounding the return of defective merchandise.
Intellectual Property and Licenses
We rely on a combination of patent, trademark, copyright and trade secret laws in the U.S. and other
jurisdictions as well as confidentiality procedures and contractual provisions to protect our brand, characters,
and proprietary technology and information.
We maintain an active program to protect our investment in technology and brands by attempting to secure
patent rights, trademark registrations and other intellectual property registrations. We have filed and obtained a
number of patents in the U.S. and abroad. We believe that the duration of the applicable patents we are
granted is adequate relative to the expected lives of our products. While our patents are an important
element of the protection of our intellectual property, our business as a whole is not materially dependent on
any one patent.
For a discussion of how our intellectual property rights may not prevent other companies from using similar
or identical technology, see Part I, Item 1A. — Risk Factors — ‘‘If we are unable to maintain or acquire
licenses to include intellectual property owned by others in our games, our operating results will suffer.’’ For a
discussion of how our intellectual property rights may not insulate us from claims of infringement by
third parties, see Part I, Item 1A. — Risk Factors — ‘‘Third parties have claimed, and may claim in the future,
that we are infringing their intellectual property rights, and we may not succeed in protecting or enforcing
our intellectual property rights.’’
In addition to proprietary materials we have developed, we use various licensed technologies in some of our
key products, such as LeapPad, Leapster and Tag. Our continued use of these rights is dependent on our
continued compliance with applicable license terms. Any failure to do so could interrupt our supply chain and
require us to modify our products or business plans. Please see Part I, Item 1A. — Risk Factors — ‘‘If we are
unable to maintain or acquire licenses to include intellectual property owned by others in our games, our
operating results will suffer’’ for further discussion of the risks we face in relying on third party technology
licenses for our products.
Seasonality
Our business is highly seasonal with a significant portion of our revenue occurring in the second half of the
year. Given relatively low sales volumes in the first half of the year and the fixed nature of many of our
operating expenses, which occur fairly evenly throughout the year, our results of operations have
historically been stronger in our third and fourth quarters relative to our first and second quarters. Conversely,
our cash flow from operations tends to be highest in the first quarter of the year when we collect a majority of
our accounts receivable related to sales made in the fourth quarter of the prior year. Cash flow from
operations is generally lowest in our third quarter, as accounts receivables collections taper off and we build
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