LeapFrog 2008 Annual Report Download - page 12

Business Segments and Operations
We organize, operate and assess our business in two primary operating segments: United States and
International. Historically, we operated a School segment that sold products tailored for the United States
educational market directly to schools, teacher supply stores and through catalogs and websites aimed at
educators. After several years of extensive investments in direct sales and in research and development, our
School segment experienced continuing sales declines, which accelerated in 2008. We believe this was primarily
due to industry consolidation and severe funding constraints that limited the availability of school funds for the
supplemental category of products that LeapFrog School marketed. As a result we decided to change our strategy
with respect to the School segment to eliminate our direct sales force and other direct facilities expenses and
instead, to leverage education resellers. During 2008, we significantly reduced our direct marketing to the
educational channel, reduced headcount and direct facilities expenses accordingly, and transferred responsibility
for this sales channel to the former U.S Consumer operating segment. This is consistent with how the chief
operating decision maker reviews performance, allocates resources and manages the business. Accordingly, we
have consolidated and reclassified the results of the operating segments formerly known as the U.S. Consumer
and School segments into the United States segment for the fiscal years ended December 31, 2008, 2007 and
2006. See Footnote 20—“Segment Reporting” in our Consolidated Financial Statements included in this Form
10-K for certain detailed information on our segments and their financial results for the fiscal years ended
December 31, 2008, 2007 and 2006. The information included throughout this Form 10-K reflects the
reclassification of prior period segment information to conform to the presentation of the current period.
Since 2006, we have focused on reducing our cost structure by improving efficiency in our operations and
reducing relatively unproductive expenditures. These efforts have included headcount reductions, migration of
certain aspects of our product development cycle to external parties and a restructuring in the fourth quarter of
2008, involving the closure of some of our offices and a company-wide reduction in force. During 2009, we will
continue our efforts to reduce our cost structure by continuing to implement process improvements and other
efficiencies. Also, in light of the continuing economic uncertainty affecting 2009, we plan to invest our resources
especially carefully, focusing on building out our core product lines, adding content, and establishing our
web-based LeapFrog Learning Path service described below.
Overview of Business Segments
The operations of LeapFrog’s business segments are described below.
•United States: The United States segment is responsible for the development, design and marketing of
electronic educational hardware products and related software, or content, sold primarily through retail
channels and through our website in the United States. We market and sell our products directly to
national and regional mass-market and specialty retailers, other retail stores and distributors and school-
related distributors and resellers through a combination of sales representatives. We also sell our
products through our online store and other Internet-based channels. The United States segment
represented approximately 79%, 77% and 77% of LeapFrog’s consolidated net sales in 2008, 2007 and
2006, respectively. The vast majority of this segment’s sales are to a few large retailers. Sales invoiced
to Wal-Mart, Toys “R” Us and Target in aggregate accounted for approximately 69%, 64% and 62% of
the segment’s gross sales in 2008, 2007 and 2006, respectively. Each of these customers accounted for
more than 10% of our consolidated and United States segment’s gross sales in each of 2008, 2007 and
2006. Accordingly, the loss of any of these three customers would have a material adverse effect on our
business.
•International:The International segment is responsible for the localization and marketing of electronic
educational hardware products and related software originally developed for the United States, sold
primarily in retail channels outside of the United States. We market and sell our products to retailers
outside the United States through various distribution arrangements. We have sales offices in Canada,
France, Mexico and the United Kingdom, or U.K. We also maintain various distribution and marketing
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