LeapFrog 2006 Annual Report Download - page 23

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.
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.
We depend on key personnel, and we may not be able to hire, retain and integrate sufficient qualified
personnel to maintain and expand our business.
Our future success depends partly on the continued contribution of our key executives and technical, sales,
marketing, manufacturing and administrative personnel. In July 2006, our board of directors appointed Jeffrey G.
Katz as our President and Chief Executive Officer. Subsequent to Mr. Katz’s appointment, we reorganized our
management team and appointed new global business leaders for our product lines. During 2006, we hired a new
Vice President of Software Engineering, Vice President of Web Products, Vice President of Hardware
Engineering, and Senior Vice President of Human Resources, and in early 2007, we hired a new Executive Vice
President, International and a new Executive Vice President of Product, Innovation and Marketing. We also
commenced a full strategic review and planning process, which will require us to add new strategic capabilities
and related management personnel. We have experienced significant turnover in our management positions. If
our new leaders are unable to properly integrate into the business or if we are unable to appropriately replace
personnel or functional capabilities on a timely basis or at all, our business will be adversely affected.
In October 2006, we completed consolidation of our office locations, moving our research and development
offices from Los Gatos, California to our corporate headquarters in Emeryville, California, approximately 50
miles away. We may face the challenge of retaining our Los Gatos personnel due to the change of location and
may be unable to hire skilled personnel to replace them. The loss of services of any of our key personnel could
harm our business. If we fail to retain, hire, train and integrate qualified employees and contractors, we will not
be able to maintain and expand our business.
Part of our compensation package includes stock and/or stock options. If our stock performs poorly, it may
adversely affect our ability to retain or attract key employees. In addition, because we have been required to treat
all stock-based compensation as an expense as of January 1, 2006, we experienced increased compensation costs
in 2006. Changes in compensation packages or costs could impact our profitability and/or our ability to attract
and retain sufficient qualified personnel.
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 / Toddler / 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 segment
competes in the U.S. supplemental educational materials market. Each of these markets is very competitive and
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