LeapFrog 2008 Annual Report Download - page 21

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act,
available (free of charge), or through the investor relations section of our website located at www.LeapFrog.com
under “About LeapFrog—Investor Relations—SEC Filings,” as soon as reasonably practicable after they are
filed with or furnished to the SEC. Information contained on or accessible through our website or contained on
other websites is not deemed to be part of this report on Form 10-K.
ITEM 1A. RISK FACTORS
Our business and the results of its operations are subject to many factors, some of which are beyond our
control. The following is a description of some of the risks and uncertainties that may affect our future financial
performance.
The current economic crisis has had a material adverse effect on our sales, and we cannot be certain when
sales will recover.
The global economic crisis led to a severe drop-off in sales in the fourth quarter of 2008 and we expect to
continue to experience an unusually challenging environment in 2009. Our sales for the fourth quarter of 2008
were significantly below our expectations, and constituted a substantially smaller percentage of our annual sales
than they have in previous years. Fourth quarter sales in 2007 and 2006 were 41% and 37% of total net sales for
those years, respectively. However in 2008, our fourth quarter net sales were only 29% of total net sales for the
year. Our fourth quarter net sales declined by 24% in 2008 compared to 2007. We rely heavily on sales to
retailers during the third and fourth quarters of each year to achieve our overall sales goals. Also we rely on
strong consumer sales in these periods to prevent unsold inventory from building up at our retailers, which can
have a continuing negative effect on our sales in the follow first and second quarters of the next year. We cannot
predict whether or when economic conditions will change and many economists predict that the recession will be
prolonged and that conditions may deteriorate further before there is any improvement.
Sales trends in 2008 also caused us to reduce our prices or offer promotional incentives or other concessions in
sales terms to stimulate retailers’ sales to consumers. As the economic weakness continues, we are likely to provide
more of these concessions in 2009 than we have in the past which may lead to, among other things, a lower-than-
expected gross margin. Consumers may become used to paying lower prices for some of our products and we may
be unable to restore normal pricing as a result. Continuing weak economic conditions in the United States or abroad
as a result of the current global economic crisis, lower consumer spending, lower consumer confidence, higher
inflation or even deflation, higher commodity prices, such as the price of oil, political conditions, natural disaster,
labor strikes or other factors could negatively impact our sales or profitability in 2009, or beyond.
Retailer liquidity problems could harm our liquidity and financial results.
If retailers encounter liquidity problems due to weak sales or their inability to raise sufficient capital because
of credit constraints, we may not be able to collect the accounts receivable we generate based on the orders we
fulfill. In recent months, some retailers have not paid us in a timely manner and others have indicated that they
are unable to pay any vendors. In addition, there have been an escalating number of bankruptcies among retailers,
including Woolworths in the United Kingdom and Circuit City and eToys in the United States. In those
circumstances, we are likely to collect less money than we are owed, and may collect nothing. This is particularly
true where the retailer had significant secured debt ahead of our claims. There have been reports and speculation
regarding the financial viability of several of our major customers. If any of our large retailers suspend or reduce
payments to us or file for bankruptcy, the resulting bad debt expense we would incur would likely have a
material adverse effect on our results of operations. Further, the combined effect of any smaller retailers failing
to make payments could seriously harm our results. In our balance sheet as of December 31, 2008, we reduced
our accounts receivable by an allowance for doubtful accounts, but the allowance would need to be increased if
retailers continued to struggle or more bankruptcies were filed. Even where we are not owed money, we may be
unable to accept orders from troubled retailers, which would reduce sales.
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