LeapFrog 2009 Annual Report Download - page 23

To drive sales in 2009, we provided more pricing reductions, promotional incentives and other concessions in our
sales terms in 2009 than we have in the past and may need to continue offering such concessions in 2010 to drive
sales. Consumers may have become used to paying lower prices for some of our products and efforts to restore
normal pricing may hamper sales. Continuing weak economic conditions in the United States or abroad as a
result of the current global economic downturn, lower consumer spending (especially discretionary items), lower
consumer confidence, continued high or higher levels of unemployment, 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 ability to achieve profitability in 2010, or beyond.
Our business is seasonal, and our annual operating results depend, in large part, on sales relating to the
brief holiday season.
Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing a substantial
majority of our sales to retailers to occur during the third and fourth quarters. Even if we achieve a profit in
future years, we expect for the foreseeable future that we will incur losses in the first and second quarters of such
years. Approximately 79%, 72% and 73% of our total net sales occurred during the second half of the year during
2009, 2008 and 2007, respectively. The percentage of total sales in the second half of the year may increase as
retailers become more efficient in their control of inventory levels through just-in-time inventory management
systems, particularly as they remain cautious about over-ordering products prior to the holiday season. Generally,
retailers time their orders so that suppliers will fill the orders closer to the time of purchase by consumers,
thereby reducing their need to maintain larger on-hand inventories throughout the year to meet demand. If a
decline in the economy, or other factors, lead to a decline of sales in the third or fourth quarter in particular, it
can have a disproportionate negative impact on our results for the year. For example, with the severe economic
downturn in the third and, particularly, the fourth quarter of 2008, our sales in the fourth quarter declined to 29%
of total net sales for the year, compared to 41% and 37% of total net sales in 2007 and 2006, respectively. In
addition, soft consumer sales in the holiday season can lead to ongoing weakness in sales to retailers well into the
following year. For example, following the dramatic decline in our net sales in the fourth quarter of 2008, net
sales for our first, second and third quarters of 2009 declined by 49%, 28% and 43% respectively, compared to
the corresponding periods of 2008. Failure to predict accurately and respond appropriately to retailer and
consumer demand on a timely basis to meet seasonal fluctuations, or any disruption of consumer buying habits
during this key period, such as may result from the current economic crisis, would harm our business and
operating results.
The unexpected loss of one or more members of our executive management team or other key employees
could adversely affect our business.
We have an experienced executive management team, as well as many talented and proven employees in key
areas including but not limited to product development, engineering, and marketing. We believe that these
individuals understand our strategic priorities to revitalize our long-term growth and improve stockholder value.
We cannot make any assurances that we can retain these individuals for the period necessary for us to return to
significant profitability. Competition for high caliber personnel is strong in our area and industry, and the ability
to retain key employees during a revitalization effort can be difficult. The unexpected future loss of services of
members of our executive management team or other key employees could have an adverse effect on our
business. If we are unable to retain key personnel, then it may be difficult for us to maintain a competitive
position within our industry or implement our strategic priorities.
If we do not maintain sufficient inventory levels or if we are unable to deliver our products to our
customers in sufficient quantities, or on a timely basis, or if retail inventory levels are too high, our
operating results will be adversely affected.
The high degree of seasonality of our business places stringent demands on our inventory forecasting and
production planning processes. This was especially true in the last part of 2009 as we maintained lower inventory
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