LeapFrog 2007 Annual Report Download - page 29

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
beginning in 2006. Changes in compensation packages or costs could impact our profitability and/or our ability
to attract and retain sufficient qualified personnel.
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 risks associated with
international operations.
We derived approximately 23% of our net sales from markets outside the United States during 2007. 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 contribute 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;
• public health problems, such as outbreaks of SARS or avian flu, especially in locations where we
manufacture or otherwise have operations,
• effectively monitoring compliance by foreign manufacturers with U. S. regulatory requirements for
product safety,
• natural disasters; 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 School segment, which may not be successful.
In 1999, we launched our School segment, which was formerly known as LeapFrog SchoolHouse, to deliver
classroom instructional programs to the pre-kindergarten through fifth grade market and explore adult learning
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