LeapFrog 2006 Annual Report Download - page 35

SchoolHouse. For further information regarding our three business segments, see Note 21 to our consolidated
financial statements contained in Item 8 of this annual report.
In our U.S. Consumer segment, we market and sell our products directly to national and regional mass-
market and specialty retailers as well as to other retail stores through sales representatives and through our online
store. Our U.S. Consumer segment is our most developed business, and is subject to significant seasonal
influences, with the substantial majority of our sales occurring in the third and fourth quarters. In 2006, this
segment represented approximately 70% of our total net sales. Although we are expanding our retail presence by
selling our products online as well as to electronics and office supply stores, the vast majority of our U.S.
Consumer sales are to a few large retailers. Net sales to Wal-Mart (including Sam’s Club), Toys “R” Us and
Target accounted for approximately 70% of our U.S. Consumer segment sales in 2006 compared to 80% in 2005
and 86% in 2004. As a percentage of our consolidated net sales, combined net sales to Wal-Mart (including
Sam’s Club), Toys “R” Us and Target accounted for approximately 66%, 64% and 64% of our consolidated net
sales in 2006, 2005 and 2004, respectively.
In our International segment, which accounted for 23% of our total net sales for 2006, we sell our products
outside the United States directly to retailers and through various distribution arrangements. We have four direct
sales offices in the United Kingdom, Canada, France, and Mexico. We also maintain various distribution and
strategic arrangements in countries such as Australia, Japan, Germany, Korea and China among others. The
International segment represented approximately 23% of our total net sales in 2006.
Our SchoolHouse segment, which accounted for 7% of our total net sales for 2006, currently targets the
pre-kindergarten through 5th grade school market in the United States, including sales directly to educational
institutions and teacher supply stores, and through catalogs aimed at educators.
Business Update
In July 2006, our board of directors appointed Jeffrey G. Katz, as our President and Chief Executive Officer.
Under Mr. Katz’s leadership, we commenced and completed a full strategic review of our business. This review
was substantially completed in the Fall of 2006 and when we announced the Company plan to:
• Regain market leadership in the learn-to-read market.
• Build our business around key technology platform architectures.
• Provide web connectivity for all our products including those for ages 6 and above.
• Strengthen our portfolio of products.
• Manage the business by creating a metrics-driven culture.
We have begun to implement significant changes based on the findings of our full strategic review. In
particular, we are focusing our resources and investments in a few key areas:
• Reading solutions: We will introduce a set of successor products to our LeapPad line of business;
• Interactive educational games: Our successful Leapster line will be updated, hardware margins
improved, and our marketing will place a greater emphasis on software sales;
• Across-the-board margin improvement: We are making sourcing improvements, changing the design of
key products to reduce product cost, deleting slow-moving or weak margin stock-keeping units (SKUs),
and reducing other operating costs that are not tied to product or earnings improvement;
• Web connectivity: Key products will be web connected to support an improved play-experience and
better software sales;
28