LeapFrog 2004 Annual Report Download - page 57

economic policies, natural disasters, energy shortages, terrorism or other disruptions to their businesses, our
reputation and operating results would suffer. In addition, if our manufacturers decide to increase production for
their other customers, they may be unable to manufacture sufficient quantities of our finished products and our
business could be harmed.
Our business depends on three retailers that together accounted for approximately 64% of our net sales in
2004, and 86% of the U.S. Consumer segment sales, and our dependence upon a small group of retailers
may increase.
Wal-Mart (including Sam’s Club), Toys “R” Us and Target accounted in the aggregate for approximately
64% of our net sales in 2004. In 2004, sales to Wal-Mart (including Sam’s Club), Toys “R” Us and Target
accounted for approximately 28%, 23% and 13%, respectively, of our consolidated net sales. We expect that a
small number of large retailers will continue to account for a significant majority of our sales and that our sales to
these retailers may increase as a percentage of our total sales. In addition, if any of these retailers experience
significant financial difficulty in the future or otherwise fails to satisfy their accounts payable, our allowance for
doubtful accounts receivable could be insufficient. For example, at December 31, 2004, Wal-Mart (including
Sam’s Club) accounted for approximately 30% of our accounts receivable, Toys “R” Us accounted for
approximately 32% of our accounts receivable and Target accounted for approximately 14% of our accounts
receivable. If any of these retailers reduce their purchases from us, change the terms on which we conduct
business with them or experience a future downturn in their business, our business and operating results could be
harmed.
We do not have long-term agreements with our retailers and changes in our relationships with retailers
could significantly harm our business and operating results.
We do not have long-term agreements with any of our retailers. As a result, agreements with respect to
pricing, shelf space, cooperative advertising or special promotions, among other things, are subject to periodic
negotiation with each retailer. Retailers make no binding long-term commitments to us regarding purchase
volumes and make all purchases by delivering one-time purchase orders. If the number of our products increases
as we have planned or the roll out of versions of our Learning Center shelf displays in selected retail stores
proceeds as we anticipate, we will require more retail shelf space to display our various products. Any retailer
could reduce its overall purchases of our products, reduce the number and variety of our products that it carries
and the shelf space allotted for our products, decide not to incorporate versions of our Learning Center shelf
displays in its stores or otherwise materially change the terms of our current relationship at any time. Any such
change could significantly harm our business and operating results.
Our international consumer business 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. We began selling directly to
retailers in Canada in June 2002, to retailers in France in July 2002, and to retailers in Mexico in September
2003, and we entered the German-speaking markets in Europe through our distributor, Stadlbauer Marketing +
Vertrieb G.m.b.H., in Fall 2004. We derived approximately 24% of our net sales from outside the United States
in 2004, 14% in 2003, and 10% in 2002. 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 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, military conflicts and civil unrest;
• existing and future governmental policies;
• greater difficulty in staffing and managing foreign operations;
50