LeapFrog 2013 Annual Report Download - page 19
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Please find page 19 of the 2013 LeapFrog annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.general-purpose tablets made by major electronics manufacturers. This means that we compete, to some
extent, with much larger makers of tablets such as Apple and Amazon, as well as more traditional learning toy
companies such as Mattel and Hasbro. These companies are significantly larger and have substantially greater
financial, technical and marketing resources than we do. If the Company is unable to compete effectively or
successfully differentiate its products from the competition, business and operating results could be adversely
affected.
If global economic conditions deteriorate, our business and financial results could be affected.
We develop and distribute educational entertainment for children. Our performance is impacted by the level of
discretionary consumer spending. Consumers’ discretionary purchases of educational entertainment items for
children may be impacted by unemployment, foreclosures, bankruptcies, reduced access to credit, interest
rates, stagnant or declining wages, and other macroeconomic factors that affect consumer spending behavior.
Uncertainty with respect to future government spending and related national debt levels in the United States
and the European Union pose a significant threat to the global economy as a whole. If these or other matters
led to a deterioration of global economic conditions, it could potentially have a material adverse effect on our
business and operating results.
We rely on a small group of retailers that together accounted for the majority of our annual gross sales
such that economic or other difficulties that affect these retailers or changes in their purchasing or
related decisions could have a significant impact on our business and operating results.
Our top three retailers in 2013 were Wal-Mart, Toys ‘‘R’’ Us and Target, which accounted for approximately
63% of the U.S. segment’s gross sales in 2013 and 66% in 2012. In addition, Wal-Mart, Toys ‘‘R’’ Us and
Target accounted for approximately 26% of the international segment’s gross sales in 2013 and 27% in 2012.
For the foreseeable future, we expect to continue to rely on a small number of large retailers for the majority
of our sales domestically and abroad.
We do not have long-term agreements with any of our retailers and retailers make all purchases by delivering
one-time purchase orders. As a result, pricing, shelf space, cooperative advertising or special promotions,
among other things, with each retailer are subject to periodic negotiation and alteration.
We rely on our retail customers to successfully sell our products to consumers. Economic and other factors
that adversely affect retailers, such as increased competition from online retailers, store closures, consolidation
in the retail sector, bankruptcies and liquidity problems may adversely affect us. For example, the bankruptcy
of one of our customers in 2012 resulted in bad debt expense of approximately $3.1 million. If any of these
retailers reduce their purchases from us, materially change the terms on which we conduct business with them
or experience a downturn in their business for any reason, our business and operating results could be
adversely affected.
If our marketing and advertising efforts fail to resonate with our customers, our business and operating
results could be adversely affected.
Our products are marketed through a diverse spectrum of advertising and promotional programs. Our ability to
sell our products and services is dependent in part upon the success of these programs. Additionally, given the
importance of sales during the year-end holiday season, our marketing efforts tend to be concentrated in the
fourth quarter. With this concentration, it can be more difficult to accurately assess the effectiveness of the
advertising and make any necessary adjustments before the end of the year. If the marketing for our products
and services fails to resonate with consumers, particularly during the critical holiday season or during other
key selling periods, or if we are unable to accurately assess the effectiveness of our advertising and make
necessary adjustments, our business and operating results could be materially affected.
Our business is highly 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 though we achieved net
income for the fiscal year ended December 31, 2013, we incurred losses in the first and second quarters of
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