LeapFrog 2010 Annual Report Download - page 11

PART I
ITEM 1. BUSINESS
LeapFrog (“LeapFrog” or “we”), founded in 1995 and incorporated in 1997 in the State of Delaware, designs,
develops and markets a family of innovative technology-based learning platforms, related proprietary content and
learning toys, primarily for infants and for children through age nine, both at home and in schools around the
world. Our product portfolio consists of learning toys, interactive reading systems, mobile learning systems, and
software-based book and game content. We have developed a number of learning platforms, including the
Leapster family of mobile learning systems, and Tag and Tag Junior reading systems, which support a broad
library of software titles. These and others of our products connect to our proprietary online LeapFrog Learning
Path (the “Learning Path”), which provides parents with personalized learning feedback and children with richer
interactive learning experiences. We have created more than 400 interactive software titles for our platforms,
covering subjects such as phonics, reading, writing, and math. Our products are available in five languages
(including Queen’s English) and are sold globally through retailers, distributors, directly to consumers via the
leapfrog.com web-store, and directly to schools.
Mollusk Holdings, LLC, an entity controlled by Lawrence J. Ellison, Chief Executive Officer (“CEO”) of Oracle
Corporation, holds a majority of the voting power of our outstanding stock. LeapFrog is headquartered in
Emeryville, California.
Business Overview
Following the 2008 global recession, our 2009 net sales, particularly during the first three quarters, were
adversely impacted by high retail inventory levels. We employed several strategies in 2009 in response to the
adverse economic climate including: increased use of discount and promotion programs, tight inventory
production management, the launch of several lower priced products and heightened focus on reducing our cost
structure. As a result of executing these strategies, retail inventory levels were brought down to appropriate levels
by the third quarter of 2009 and our financial performance reflected dramatic improvement with near profitability
for the full year. We believe we entered 2010 positioned for success.
Net sales for the first three quarters of 2010 were 27% higher than the same period of 2009, growing 42%, 26%
and 23%, for the first, second and third quarters, respectively. The high year-over-year growth rates were
partially a result of the high 2008 retail inventory levels that reduced retailer demand for our products in 2009. In
addition, we also launched several new products that contributed to the growth of net sales in 2010. Although the
fourth quarter of 2010 included a strong start to the holiday season with a successful Black Friday, consumer
demand in December softened relative to our expectations and net sales for the quarter ended flat as compared to
the same quarter in 2009. The weaker than expected fourth quarter consumer demand resulted in higher retail
inventory levels at the end of the year than we had planned, which we expect will affect net sales growth in the
first half of 2011.
Overall net sales growth for 2010 was 14% over 2009, largely based on strong acceptance of our newest mobile
learning platform, Leapster Explorer. Most importantly, we returned to profitability in 2010 for the first time in
five years. Earnings per share improved by $0.12 per share and we believe we are positioned to achieve higher
levels of profitability in 2011.
Business Segments and Operations
We organize, operate and assess our business in two primary operating segments: United States (“U.S.”) and
International. See Note 20—“Segment Reporting” in our Consolidated Financial Statements included in this
Form 10-K for detailed information on our segments and their financial results for the fiscal years ended
December 31, 2010, 2009 and 2008.
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