LeapFrog 2006 Annual Report Download - page 18

analytics, financial planning and financial reporting. For information as to how our information technology
environment could affect our business, see “Item 1A—Risk Factors—We have had significant challenges to our
management systems and resources, particularly in our supply chain and information systems, and as a result we
may experience difficulties managing our business.”
Retail Sales Service and Consumer Service
We believe that our ability to establish and maintain long-term relationships with consumers and retailers
depends, in part, on the strength of our customer support and service operations. We encourage and utilize
frequent communication with and feedback from our consumers and retailers to continually improve our products
and service. We have a dedicated retail sales service team that works with our top retailers and provides
point-of-sale related analysis for better forecasting and inventory plans. We believe that providing direct contact
with our existing and targeted retailer customers is an efficient way to convey the value of our products and
services and demonstrate the advantages of our products over those of our competitors.
We have contracted with an outside customer service provider who operates hours appropriate to our
industry. The customer service provider’s schedule of operation varies to keep pace with the seasonality of our
current business. We respond to email inquiries received through our website, and we have a team of in-house
consumer service representatives who oversee and coordinate our customer service activities with our third-party
customer service providers. In addition, we have a knowledge resource link on our website that directs
consumers to a frequently asked questions section, which we update as we receive consumer feedback.
Competition
We compete broadly within the U.S. and international toy industry in the Infant / Toddler / Preschool, and
electronic learning aids categories. These categories continue to grow in size and importance, and as a result have
become an increasingly competitive arena. Competitors in the educational toy market continue to increase their
investment in product research and development and advertising, while focusing on management of global
product launches and retail shelf space and market share of products sold directly through online internet based
channels. We believe our products compete in these market segments based on brand, product design features,
learning content and experience, quality and price. We believe the LeapFrog brand is recognized for quality
educational products, enabling us to compare favorably with many of our current competitors on some or all of
these factors. For a discussion of the possible effects that competition could have on our business, see “Item
1A.—Risk Factors—If we are unable to compete effectively with existing or new competitors, our sales and
market share could decline.”
Our Infant / Toddler / Preschool category is strategically significant because it introduces parents to the
LeapFrog line of educational products. While our products are differentiated by their educational branding, we
face competition from a wide field of companies in all of our major markets. Historically, our principal
competitors in the Infant / Toddler / Preschool category have included Mattel, Inc. primarily under its Fisher-
Price brand, Hasbro, Inc. and Vtech Holdings Ltd. We also compete with companies that are relatively new to the
educational product arena, many of which are smaller than our traditional competitors.
As we move forward with our strategies of providing web connectivity for all our key products and aging-up
our portfolio to serve a wider age range of children, we will compete increasingly with products in a number of
other categories and industries including computer products, electronic and online games and entertainment
appliances. In 2005, we introduced our FLY Pentop Computer. The FLY Pentop Computer is targeted at the
market for ages eight years and older. Our FLY marketing plan has allowed us to begin to merchandise our
products away from the toy aisle and other LeapFrog branded products. Competitive products in this industry
include handheld and console-based gaming platforms from Sony, Microsoft and Nintendo and games and other
software produced for these platforms. Other products, such as MP3 music players, also compete for consumer
disposable income currently allocated to educational toys. The FLY Pentop Computer and associated products,
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