LeapFrog 2002 Annual Report Download - page 54

division’s curriculum-based products will depend principally on broadening market acceptance of those products,
which in turn depends on a number of factors, including:
• our ability to demonstrate to teachers and other key educational institution decision-makers the
usefulness of our products to supplement traditional teaching practices;
• the willingness of teachers, administrators, parents and students to use products in a classroom setting
from a company that may be perceived as a toy manufacturer;
• the effectiveness of our sales force, particularly since we rely on independent sales representatives;
• the availability of state and federal government funding, which may be severely limited due to budget
shortfalls currently faced by many states and the federal government, to defray, subsidize or pay for the
costs of our products; and
• our ability to demonstrate that our products improve academic performance.
If we cannot increase market acceptance of our SchoolHouse division’s supplemental educational products,
including our LeapTrack assessment system introduced in Fall 2002, the division may not become profitable and
our future sales could suffer. As of December 31, 2002, we had capitalized $3.2 million of our content
development costs relating to our SchoolHouse division. In addition, we expect to capitalize approximately $0.9
million in the first quarter of 2003. If the SchoolHouse division does not become profitable, we may have to
write off some or all of these capitalized costs, which could significantly harm our operating results.
Our planned expansion into international markets may not succeed and our future operating results could
be harmed by economic, political, regulatory and other risks associated with international sales and
operations.
We have limited experience with sales operations outside the United States. In January 2000, we expanded
beyond the use of international distributors to sell our products and started selling our products directly to
retailers in the United Kingdom. We began selling directly to retailers in Canada in June 2002, and we began
selling directly to retailers in France in July 2002. We derived approximately 10% of our net sales from outside
the United States in 2002 and 5% in 2001. We intend to increase our international sales through additional
overseas offices to develop further our direct sales efforts, distributor relationships and strategic relationships
with companies with operations outside of the United States, such as Benesse Corporation and Sega Toys in
Japan. However, these and other efforts may not help increase sales of our products outside the United States.
Our business is, and will increasingly be, subject to risks associated with conducting business internationally,
including:
• political and economic instability and civil unrest;
• existing and future governmental policies;
• greater difficulty in staffing and managing foreign operations;
• complications in modifying our products for local markets or in complying with foreign laws, including
consumer protection laws and local language laws;
• transportation delays and interruptions;
• greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;
• trade protection measures and import or export licensing requirements;
• currency conversion risks and currency fluctuations;
• longer payment cycles, different accounting practices and problems in collecting accounts receivable;
and
• limitations, including taxes, on the repatriation of earnings.
Any difficulty with our international operations could harm our future sales and operating results.
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