LeapFrog 2006 Annual Report Download - page 3

Fiscal 2006 in Review – The ‘Fix’ Phase
Our 2006 results were more than a disappointment. They were unsatisfactory in every
respect. Net sales for 2006 declined to $502 million for the year and net loss per diluted
share for 2006 was $2.31. As we have mentioned, the principal cause of our sales declines
was the continuing weakness in the LeapPad family of products. Additionally, earnings were
unfavorably impacted by inventory write-downs, write-offs of our deferred tax assets, and
the costs associated with our executive restructuring.
Since announcing our key changes in direction in fall of 2006, however, we began
implementing the ‘Fix’ phase of our plan, and in the last half of 2006, we have made good
progress:
• We have strengthened our balance sheet by reducing inventories at both our warehouses
and at retailers. As a result of our significant inventory improvements, cash and invest-
ments more than doubled from 2005 levels to $148 million at year-end 2006.
• We also made sourcing improvements and initiated design changes for key products to
reduce production costs and we eliminated slow-moving and weak margin SKUs to make
room for new LeapFrog products in our portfolio.
• We restructured our SchoolHouse division to restore profitability. We reduced expenses,
prioritized our product development efforts on reading and are concentrating our sales
efforts on profitable territories.
• We strengthened our team by making a number of key management appointments in
product development, marketing, international sales, software engineering, web prod-
ucts, and human resources leadership. We also removed a layer of senior management
and promoted our most successful brand leaders into roles where each has global authority
over major product lines.
While the costs associated with these actions contributed negatively to our 2006 financial
results, these initiatives allow us to enter 2007 with healthy inventories, a distribution pipe-
line ready for new products and a strong cash position with which to execute the ‘Reload’
phase of our strategic plan.
Our Current Path –‘Reload,’ then ‘Grow’
This year we will continue to make many operational improvements with an eye towards
restoring and achieving satisfactory earnings. Our principal focus in 2007 will be on
strengthening our product portfolio for 2008 and executing well with the products we
currently have in the market.
In 2007, we are launching a number of new products, including the FLY Fusion Pentop
Computer, our next generation FLY product, ClickStart My First Computer system, the largest
ever software library expansion for our category leading Leapster family, Word Launch for
preschool age children, Brightlings for infants, and an expansion of our popular bilingual
Learn and Groove line.
While critical to our ‘Reload’ efforts, we do not expect our 2007 initiatives to be extensive
enough to restore earnings. We, therefore, expect to report a net loss for the year, albeit
substantially smaller than our loss for 2006. This expectation takes into account the invest-
ments we are making in our future, with a robust product rollout planned for 2008 and
considerable support for our brand and current product line-up. In 2008, we believe that
shareholders should see the benefits from our new reading products, our next generation
Leapster and the strengthening of our international business. These initiatives, and others
in development, will set the stage for our longer term ‘Grow’ phase commencing in 2008.