LeapFrog 2011 Annual Report Download - page 24

If we do not maintain sufficient inventory levels or if we are unable to deliver our products to our
customers in sufficient quantities, or on a timely basis, or if inventory levels are too high, our operating
results will be adversely affected.
The high degree of seasonality of our business places stringent demands on our inventory forecasting and
production planning processes. This inventory management approach may be particularly challenging when
combined with ‘‘just-in-time’’ inventory management systems increasingly used by retailers as they remain
cautious about future inventory levels. If we fail to meet tight 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, 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, high inventory levels at the end of 2010 adversely impacted our 2011 net
sales, particularly during the first half of the year, which were 10% lower than the same period of 2010.
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, smart mobile devices and tablets. 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.
If we are unable to maintain or acquire licenses to include intellectual property owned by others in our
games, our operating results will suffer.
Among our proprietary rights are inbound licenses from third parties for content, such as characters, stories,
music, illustrations and trade names, and for technologies we incorporate in our products including key
technology used in our Tag and Tag Junior reading systems. In particular, we rely on our ability to acquire
rights to popular entertainment media properties for content on our multimedia learning platforms and learn to
read 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 significantly impact our content sales or interrupt our
supply chain and require us to modify our products or business plans.
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 the course of our business, we periodically receive claims of infringement or otherwise become aware of
potentially relevant patents, copyrights, trademarks or other intellectual property rights held by other parties.
Responding to any infringement claim, regardless of its validity, may be costly and time-consuming and may
divert our management and key personnel from our business operations. If we, our distributors, our licensors
or our manufacturers are adjudged to be infringing the intellectual property rights of any third party, we or
they may be required to obtain a license to use those rights, which may not be obtainable on reasonable terms,
if at all. We also may be subject to significant damages or injunctions against the development and sale of
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