LeapFrog 2006 Annual Report Download - page 26

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.
We rely on various information technology systems and business processes to manage our operations. We
are currently implementing modifications and upgrades to our systems and processes. There are inherent costs
and risks associated with replacing and changing these systems and processes, including substantial capital
expenditures, demands on management time and the risk of delays or difficulties in transitioning to new systems
or of integrating new systems into our current systems. Any information technology system disruptions, if not
anticipated and appropriately mitigated, could have an adverse effect on our business and operations.
Our international consumer business may not succeed and subjects us to risk associated with international
operations.
We derived approximately 23% of our net sales from markets outside the United States in 2006. As part of
our business review, we announced in July 2006, we are in the process of reviewing our international business
and expect to strengthen our international product and distribution effectiveness. However, our efforts to increase
sales for our products outside the United States may not be successful and may not achieve higher sales or gross
margins or contribution to profitability.
Our business is, and will increasingly be, subject to risks associated with conducting business
internationally, including:
• developing successful products that appeal to the international markets;
• political and economic instability, military conflicts and civil unrest;
• greater difficulty in staffing and managing foreign operations;
• transportation delays and interruptions;
• greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;
• complications in complying with laws in varying jurisdictions and changes in governmental policies;
• trade protection measures and import or export licensing requirements;
• currency conversion risks and currency fluctuations; and
• limitations, including taxes, on the repatriation of earnings.
Any difficulties with our international operations could harm our future sales and operating results.
Our financial performance will depend in part on our SchoolHouse segment, which may not be successful.
We launched our SchoolHouse segment in June 1999 to deliver classroom instructional programs to the
pre-kindergarten through 5th grade school market and explore adult learning opportunities. To date, the
SchoolHouse segment, has incurred cumulative operating losses. In December 2006, we announced a
reorganization of the SchoolHouse segment, which reduced the size of our SchoolHouse organization by half.
Going forward, the segment is focusing sales and product development resources on reading curriculum for core
grade levels. However, if we cannot continue to increase market acceptance of our SchoolHouse segment’s
supplemental educational products, the segment’s future sales and profitability could suffer.
Our intellectual property rights may not prevent our competitors from using our technologies or similar
technologies to develop competing products, which could weaken our competitive position and harm our
operating results.
Our success depends in large part on our proprietary technologies that are used in our learning platforms and
related software. We rely, and plan to continue to rely, on a combination of patents, copyrights, trademarks,
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