LeapFrog 2005 Annual Report Download - page 23

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. For example,
net sales of the Classic LeapPad and My First LeapPad in our U.S. Consumer business peaked in 2002 and have
been declining since. Therefore, the introduction of new products and the enhancement and extension of existing
products, through the introduction of additional software or by other means, is critical to our future sales growth.
To remain competitive, we must continue to develop new technologies and products and enhance existing
technologies and product lines, as well as successfully integrate third-party technology with our own.
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.
In 2005, we introduced a number of new platforms, stand-alone products, interactive books and other
software for each of our three business segments, including our FLY Pentop Computer, which is targeted at an
older age group of consumers than we have focused on in the past, and our Leapster L-MAX handheld for
television-based learning. We cannot assure you that these products will be successful or that other 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 advertising and promotional activities may not be successful.
Our products are marketed through a diverse spectrum of advertising and promotional programs. Our ability
to sell product is dependent in part upon the success of such programs. If we do not successfully market our
products, or if media or other advertising or promotional costs increase, these factors could have a material
adverse effect on our business and results of operations.
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 infant and toddler category, preschool category 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 that we are also beginning to compete, and will increasingly compete in the future, with
makers of popular game platforms and smart mobile devices such as personal digital assistants. Our SchoolHouse
division competes in the U.S. supplemental educational materials market. 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. They may
also devote greater resources to the development, promotion and sale of their products than we do. We cannot
assure you that we will be able to compete effectively in our markets.
Our business depends on three retailers that together accounted for approximately 64% of our
consolidated net sales in 2005, and 80% 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 2005. In 2005, sales to Wal-Mart (including Sam’s Club), Toys “R” Us and Target
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