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| LF > SEC Filings for LF > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
Forward Looking Statements
This report on Form 10-Q, including the sections entitled "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 1A. Risk Factors," contains forward-looking statements, including statements regarding; the effects of global economic conditions on our business, our expectations for sales trends, margins, profitability, liquidity, expenses, inventory or cash balances, capital expenditures, cash flows, or other measures of financial performance in future periods, future products and services we may offer, anticipated competitive benefits of our strategy or of current or future products or services, and the effects of strategic actions on future financial performance. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under "Risk Factors" in Part II, Item 1A of this Form 10-Q and those found elsewhere in this Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report.
The following management's discussion and analysis of financial condition and results of operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of LeapFrog Enterprises, Inc. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements ("Notes") in Part I, Item 1 of this report.
Our Business
We design, develop and market a family of innovative technology-based learning platforms and related proprietary content for children of all ages for use at home and in schools around the world. We have created more than 150 interactive software titles, covering important subjects such as phonics, reading, writing and math. In addition, we have a broad line of stand-alone educational products, or toys, that do not require the separate purchase of software and are generally targeted at infants through five year olds. Our products are available in six languages and are sold globally through retailers, distributors and directly to schools. Our goal is to create educational products that kids love, parents trust and teachers value.
We generate revenue from developing, manufacturing, and selling platform hardware including our Tag and Tag Jr. reading systems, our classic Leapster, Leapster2 and Didj educational gaming platforms, and Clickstart: My First Computer learning system, along with a range of other learning toys. We also generate revenue from developing and licensing a wide range of content for our platforms.
Our products compete most directly in the toy industry in the pre-school toy and electronic learning aids categories, both in the United States and in selected international markets. The educational toy category continues to attract new entrants as well as new innovative products, and competition is significant.
Our business is highly seasonal with a significant portion of our revenues occurring in the second half of the year. Given relatively low sales volumes in the first half of the calendar year and the relatively fixed nature of many of our operating expenses, which occur fairly evenly throughout the year, our results of operations are generally stronger in our third and fourth quarters relative to our first and second quarters. Conversely, our historical cash flow from operations tends to be highest in the first quarter of the year, when we collect the majority of our accounts receivable related to the prior year's fourth quarter sales, and lowest in our third quarter as we begin building inventory in preparation for the fourth quarter holiday season.
The global economic crisis led to a severe decline in our sales in the fourth quarter of 2008 resulting in a departure from our normal seasonal pattern described above. Our sales for the fourth quarter were significantly below our expectations and constituted a substantially smaller percentage of our annual sales than they have in previous years. Given the seasonality of our business, declines in sales in the third and fourth quarters generally have a disproportionate impact on our annual operating results as well as our cash flows from operations at the beginning of the following year which was the case for the first six months of 2009. As retailers continue to reduce their inventory levels that accumulated after consumer sales declined, our sales through at least the third quarter of 2009 are likely to continue to be lower than our corresponding sales in 2008.
We continue to improve efficiency in our operations by eliminating unnecessary expenditures. In the fourth quarter of 2008, we completed a restructuring that involved the closure of some of our offices and a company-wide reduction in force. In 2009, we have continued to streamline our cost structure by implementing further process improvements to create additional efficiencies. For example, during the second quarter of 2009, we sublet a portion of our headquarter facilities in Emeryville, California that we vacated in 2008 as a part of an overall restructuring. In addition, we have continued to adjust our staffing levels in the second quarter to reduce overhead, and we currently plan to spend less on non-targeted advertising. We intend to focus our resources on building out our core product lines and adding to our content library, as well as further reduce other expenditures, particularly those related to selling, general and administrative activities, to correspond to our best ongoing estimates of consumer spending trends.
We invest in research and development ("R&D") of existing and new lines of business that we believe may contribute to our long-term growth. For example, we continue to invest in developing new hardware platforms and content based on new technologies for both stand-alone and online experiences. We believe delivering innovative and high-value platforms and online experiences is the key to meeting customer needs and to our future growth.
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 negatively impacted our sales in the first two quarters of 2009. In addition, an increasing number of retailers have encountered liquidity problems. If any of our most significant retailers suspend or reduce payments to us, become insolvent 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, continued deterioration in economic conditions could trigger events or circumstances indicating goodwill impairment has more likely than not occurred. We considered the need to update our most recent annual goodwill annual impairment test as of June 30, 2009 and concluded that there were no impairment indicators and we believe the assumptions used during the year end assessment remained appropriate. The potential business risk for us from macroeconomic conditions anticipated for 2009 is discussed further in Part II. Item 1A.-Risk Factors-"The current economic crisis has had a material adverse effect on our sales, and we cannot be certain when sales will recover," "Retailer liquidity problems could harm our liquidity and financial results," "Our liquidity may be insufficient to meet the long-term or periodic needs of our business" and "Our net loss would be increased and our assets would be reduced if we are required to record impairment charges related to the value of our intangible assets."
Our strategic priorities for 2009 and beyond are to invest in the core categories of reading, educational gaming, our standalone toy line and in our Learning Path "ecosystem." Our marketing will be aimed at increasing consumer sales in these categories, to drive a higher percentage of content sales, and to catalyze new growth in the learning category. We have launched new connected products and content in our reading and gaming categories, as well as our standalone learning toy line in 2009. Importantly, we also expanded our learning toy line, including our attractively-priced Scout line of learning toys, and the Zippity learning system, a gaming system featuring full body-movement controls, which is our first co-branded product with Disney.
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