LeapFrog 2003 Annual Report Download - page 49

delivery or performance of multiple products, services or rights to use assets. Under EITF 00-21, revenue
arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables
meet certain criteria, including whether the delivered items have stand alone value to the customer and whether
there is objective and reliable evidence of the fair value of the undelivered items. In addition, the consideration
should be allocated among the separate units of accounting based on their fair values, and the applicable revenue
recognition criteria should be considered separately for each of the separate units of accounting. EITF 00-21 was
effective for revenue arrangements entered into after June 30, 2003. The application of EITF 00-21 did not have
amaterial impact on our financial position, operating results or cash flows for the year ended December 31,
2003.
Risk Factors That May Affect Our Results and Stock Price
Our business and our stock price are subject to many risks and uncertainties that may affect our future
financial performance. Some of the risks and uncertainties that may cause our operating results to vary or that
may materially and adversely affect our operating results are as follows:
If we fail to predict consumer preferences and trends accurately, develop and introduce new products
rapidly or enhance and extend our existing core products, our sales will suffer.
Sales of our platforms, related software and stand-alone products typically have grown in the periods
following initial introduction, but we expect sales of specific products to decrease as they mature. The
introduction of new products and the enhancement and extension of existing products, through the introduction
of additional software or by other means, are critical to our future sales growth. The successful development of
new products and the enhancement and extension of our current products will require us to anticipate the needs
and preferences of consumers and educators and to forecast market and technological trends accurately.
Consumer preferences, and particularly children’s preferences, are continuously changing and are difficult to
predict. In addition, educational curricula change as states adopt new standards. The development of new
interactive learning products requires high levels of innovation and this process can be lengthy and costly. To
remain competitive, we must continue to develop enhancements of our NearTouch and other technologies
successfully. In 2004, we intend to introduce a number of new platforms, stand-alone products and interactive
books and other software for each of our three business segments. We cannot assure you that these or other future
products will be introduced or, if introduced, will be successful. The failure to enhance and extend our existing
products or to develop and introduce new products that achieve and sustain market acceptance and produce
acceptable margins would harm our business and operating results.
Our business is seasonal, and therefore our annual operating results depend, in large part, on sales
relating to the brief holiday season.
Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing the
substantial majority of our sales to U.S. retailers to occur during the third and fourth quarters. In 2003,
approximately 79% of our total net sales occurred during this period. This percentage of total sales may increase
as retailers become more efficient in their control of inventory levels through just-in-time inventory management
systems. Generally, retailers time their orders so that suppliers like us will fill the orders closer to the time of
purchase by consumers, thereby reducing their need to maintain larger on-hand inventories throughout the year to
meet demand. While these techniques reduce retailers’ investments in their inventory, they increase pressure on
suppliers to fill orders promptly and shift a significant portion of inventory risk and carrying costs to suppliers
like us. The logistics of supplying more product within shorter time periods will increase the risk that we fail to
meet tight shipping schedules, which could damage our relationships with retailers, increase our shipping costs or
cause sales opportunities to be delayed or lost. For example, in the second half of 2003, one of our largest retail
customers changed its order pattern to occur later in the holiday season, which we believe delayed a significant
portion of our net sales to this customer from the third quarter of 2003 to the fourth quarter of 2003. The seasonal
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PART II