LeapFrog 2008 Annual Report Download - page 35

29% of total net sales for the year. Our fourth quarter net sales declined by 24% in 2008 compared to
2007. Given the seasonality of our business, declines in sales in the third and fourth quarters can have a
disproportionate impact on our annual operating results as well as our cash flows from operations at the
beginning of the following year.
We continue to invest in research and development of existing and new lines of business that we believe
may contribute to our long-term growth. We also invest in research and development of advanced technologies
for future hardware platforms and content, providing for standalone and online experiences. We believe
delivering innovative and high-value solutions through our platforms and online experiences is the key to
meeting customer needs and to our future growth.
Since 2006 we have focused on reducing our cost structure by improving efficiency in our operations and
eliminating unnecessary expenditures. This effort has 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, including employees in our former
School business segment. During 2009, we will continue our efforts to reduce our cost structure by continuing to
implement process improvements and other efficiencies. In light of the continuing economic uncertainty
affecting 2009, we plan to invest our resources with particular focus on improving cash flow. Thus, we will
continue to focus our research and development, or R&D, resources on building out our core product lines and
adding to our content library, as well as further reducing other expenditures, particularly those related to selling,
general and administrative activities to correspond to our best ongoing estimates of consumer spending trends.
In 2009 and succeeding years we plan to introduce new products in our reading solutions, educational
gaming, and learning toy product lines. Additional focus will be placed on expanding our content library,
establishing parents’ familiarity with the Learning Path, and expanding our online play components. The next
few years will reflect more methodical efforts to concurrently launch our core product range internationally to
boost our performance outside of the U.S., as well as to drive efficiencies and reduce costs throughout the
company. We are also pursuing partnership relationships with third-party school publishers and developers to
render some of their proprietary content compatible with selected LeapFrog technology platforms.
We face significant risks associated with the economic downturn and continuing uncertainty through at least
2009. Weak sales in the fourth quarter of 2008 meant that retailers built up inventories of our products, which
could harm our sales in the first part of 2009 and beyond. In addition, an increasing number of retailers have
encountered liquidity problems. If any of our most significant retailers suspend or reduce payments to us or
declare bankruptcy, or file for bankruptcy, the resulting bad debt expense we would incur would likely have a
material adverse effect on our results of operations. The potential business risk for us from macroeconomic
conditions anticipated for 2009 is discussed further in Part I. Item 1A.—Risk Factors—“The current economic
crisis had a material adverse effect on our sales in 2008, and we cannot be certain when sales will recover,”
“Retailer liquidity problems could harm our liquidity and financial results in 2009” and “Our liquidity may be
insufficient to meet the long-term or periodic needs of our business.”
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. 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 former 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, our customers and our products for the fiscal years ended December 31, 2008, 2007
and 2006.
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