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LeapFrog Annual Report
2007
Onward to growth…
Dear fellow shareholders:
Last year we described at some length our strategy for putting the company on a track toward
profi tability with our Fix, Reload, and Grow plan. We expected 2007 (our Reload year) to be a year
that refl ected our transition to a new product line, and our overall results were in line with these
expectations. Sales of legacy products were only partly offset by sales of new products launched in
2007. This resulted in a substantial loss for the year, albeit a much lower loss than last year. Sales
totaled $442.3 million for 2007, a decline of 11.9% year over year. Our net loss for the year was $1.60
per share compared to $2.31 for 2006.
Despite lower net sales, we improved our gross profi t margin for the year by about 10 percentage
points to 39.2%1. We reduced our own inventory by 28% to $52.4 million, while retailers’ inventories
fell by approximately 20%. We ended 2007 with over $100 million in cash and investments and zero
debt. In summary, we have a clean balance sheet, improved margin fundamentals, and we are ready
for the Growth phase of our plan.
Getting Ready for Our Biggest Launch Year Ever*
A major focus in 2007 was preparing for the launch of a wide range of new products that will begin
shipping this summer. Today we are getting LeapFrog ready for its biggest new product launch ever.
We will launch new products in each of our age-range categories—infant, pre-school and grade
school. We will launch new products in our learning toy line, our reading line, our gaming line and in
our School division.
We are particularly enthused about the Tag Reading System, our fi rst new reading platform since our
LeapPad system was introduced in 1999. The Tag Reader is the fi rst handheld learn-to-read technology
that can be used directly with real books and which will interact with the Internet so that parents can
“see the learning.” The Tag system will launch in June, but has already received much positive attention
on the web, in consumer media, and from the retail trade. Our Tag library will feature popular licensed
characters and some content exclusives. We’ve announced an all-star line-up of publishing and
licensing partners including Disney, HarperCollins, Penguin, Scholastic and Simon & Schuster. In total
we plan to introduce a 21-volume library of interactive books and accessories with the Tag platform
launch. Launching in eight countries, Tag will be LeapFrog’s most global new product launch ever. We
believe that our Tag platform, combined with our content, the web-connected experience, and the
LeapFrog brand, will make for a very compelling product and a satisfying consumer experience.
We’re also excited about continuing LeapFrog’s leadership position in the educational gaming market.
Educational gaming was over 50% of our business in 2007 and gaming growth is expected to be three
times that of toys in the overall market over the next three years. Many are aware that gaming is hot
with adults and teenagers today, but it’s also hot with preschoolers.
1 Gross margin in 2007 includes a non-cash write-off totaling approximately $8.0 million related to required asset write-offs bringing
unamortized FLY Fusion Pentop Computer assets to levels consistent with sales trends.