LeapFrog 2012 Annual Report Download - page 69

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Options to purchase shares of common stock and RSUs totaling 1,472, 2,486, and 3,376 were excluded from
the calculation of diluted net income per share for the years ended December 31, 2012, 2011, and 2010,
respectively, as the effect would have been antidilutive.
17. Related Party Transactions
Mollusk Holdings, LLC, an entity controlled by Lawrence J. Ellison, CEO of Oracle Corporation, is one of
the Company’s largest stockholders. As of December 31, 2012, Mr. Ellison may be deemed to have or share
the power to direct the voting and disposition, and therefore to have beneficial ownership, of approximately
1.3 million shares of the Company’s Class B common stock and 1.6 million shares of the Company’s Class A
common stock, which represents approximately 12.5% of the combined voting power of the Company’s Class
A common stock and Class B common stock.
In 2012, 2011 and 2010, the Company purchased software products and support services totaling $2,912,
$2,680 and $1,138, respectively, from Oracle Corporation on terms the Company believes are comparable to
those it would obtain in an arm’s-length agreement.
18. Concentrations of Credit Risk and Certain Other Risks
Financial instruments that subject the Company to concentrations of credit risk include cash equivalents,
foreign exchange transactions and trade receivables. Cash equivalents are money market funds. Foreign
exchange transactions consist primarily of short-term foreign currency transactions with highly-rated
financial institutions.
LeapFrog manufactures and sells its products primarily to national and regional mass-market retailers in the
U.S. Credit is extended based on an evaluation of the customers’ financial condition; generally, collateral is
not required. Allowances for credit losses are provided for in the consolidated financial statements at the time
of sale. Three major retailers accounted for 69% and 74% of net accounts receivable at December 31, 2012
and 2011, respectively. Should any of these three retailers experience difficulties paying their debts to
LeapFrog, this could have a significant negative impact on the Company’s statement of operations and
cash flows.
Seasonality of Sales
Sales of LeapFrog’s products have historically been highly seasonal with a substantial majority of the sales
occurring during the third and fourth quarters. Failure to predict accurately and respond appropriately to
changes in retailer and consumer demand may cause LeapFrog to produce excess inventory, which could
adversely affect operating results and financial condition. Conversely, if a product achieves greater success
than anticipated, the Company may not have sufficient inventory to meet customer demand, which could
adversely impact LeapFrog’s relations with its customers.
Manufacturing Vendor Concentration
LeapFrog’s manufacturing and operations strategy is designed to maximize the use of outsourced services,
particularly with respect to the actual production and physical distribution of its products. The Company
believes that its outsourcing strategy enhances the scalability of the manufacturing process. Since the
Company does not have its own manufacturing facilities, it is dependent on close working relationships with
its contract manufacturers for the supply and quality of its products and the computer chips contained in these
products. LeapFrog uses contract manufacturers located in Asia, primarily in China, to manufacture its
finished products. Given the highly seasonal nature of its business, any unusual delays or quality control
problems could have a material adverse effect on LeapFrog’s operating results and financial condition.
LeapFrog’s top three vendors supplied a total of 73%, 65% and 57% of LeapFrog’s products in 2012, 2011
and 2010, respectively. In 2011, LeapFrog’s largest individual vendor, Wynnewood Corp. Ltd., located in
China, supplied 35% of LeapFrog’s products. In 2012 and 2010, WKK Technology Limited, located in China,
supplied 40% and 24%, respectively, of LeapFrog’s products. The Company expects to continue to use a
limited number of contract manufacturers and fabricators.
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