LeapFrog 2006 Annual Report Download - page 38

Our outlook for 2007 and 2008 is consistent with our new strategic plan introduced in Fall 2006.
• We plan to strengthen our position in the reading market by developing new reading solutions products,
historically, our most successful product line, which we will begin introducing in 2008.
• We will leverage the success of our Leapster product by introducing 2008 significant updates to the
product and to the Leapster family and expanding our software library.
• We will “age-up” our portfolio (i.e., increase the percentage of our products aimed at children age 6 and
above) by launching products which are aimed at children who are older than our historically successful
grade school age segment, such as our new FLY Fusion, Fusion software and Fusion accessories. We
anticipate that FLY Fusion will be utilized as well by our SchoolHouse division and by third party
partners around the world.
• We will utilize the web to improve our users’ product experience, and to drive sales, marketing and
brand awareness
• In the third quarter of 2007, we will launch a number of new products, including our new FLY Fusion
Pentop Computer, our first web-connected platform, our new ClickStart My First Computer system and
a number of products in our infant / Toddler / preschool category.
While we expect these and other changes to improve trends in our performance, we do not expect them to
contribute substantially until after 2007, due to the lead time associated with our product development, sourcing
and distribution aspects our business and also due to the year end seasonality that drives substantially all of our
sales volume. Accordingly, we expect a modest sales decline in 2007, improved gross margins from 2006 due to
2006 inventory reduction efforts and improved product mix and a decline in operating expenses from 2006,
consistent with the decline in sales. Overall, we expect a loss in 2007, which we expect to be significantly less
than the loss for 2006.
For information on our operating plan that could affect our business, see “Item 1A.—Risk Factors—Our
operating plan may not correct recent trends in our business.”
Critical Accounting Policies, Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and reported
disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition,
allowances for accounts receivable, inventory valuation, the valuation of deferred tax assets and tax liabilities,
intangible assets and stock-based compensation. We base our estimates on historical experience and on complex
and subjective judgments often resulting from determining estimates about the impact of events and conditions
that are inherently uncertain. These estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2 to our consolidated financial statements. Certain
accounting policies are particularly important to the portrayal of our financial position and results of operations
and require the application of significant judgment by our management. We believe the following critical
accounting policies are the most significant in affecting judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
We recognize revenue when products are shipped and title passes to the customer provided that there are no
significant post-delivery obligations to the customer and collection is reasonably assured. Net sales represent
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