LeapFrog 2003 Annual Report Download - page 38

The increase in advertising expense was primarily related to increases in television advertising. The increase
in television advertising expense was due to a substantial increase in media time used in an effort to strengthen
our brand awareness and promote our expanded product line, including the introductions of our Leapster,
LeapPad Plus Writing and LittleTouch LeapPad platforms. The increase in our International segment was related
primarily to our television and print advertising spending in the United Kingdom and Canada.
We anticipate advertising expenses to increase in dollars but remain relatively flat, as a percentage of net
sales, in 2004.
Depreciation and Amortization Expenses (excluding depreciation of tooling and amortization of content
development costs, which are included in cost of sales)
Depreciation and amortization expenses increased by $1.0 million, or 16%, from $6.6 million in 2002, to
$7.7 million in 2003. As a percentage of net sales, depreciation and amortization expense decreased from 1.3% in
2002 to 1.1% in 2003.
The increase in the depreciation and amortization expense is primarily due to higher depreciation expense of
computers and software purchased to support our worldwide expansion, offset by lower amortization of website
development expenses. We are no longer capitalizing website development costs as our website design and
development was largely completed in 2002.
Income (Loss) From Operations
Our income from operations increased by $38.1 million, or 53%, from $71.4 million in 2002 to $109.5
million in 2003. As a percentage of net sales, our income from operations increased from 13.4% in 2002 to
16.1% in 2003. The improvement was primarily due to increased sales and operating expense leverage.
Income (loss) from operations in dollars and the related percentage of segment net sales were as follows:
Year Ended December 31,
2003 2002 Change
Segment $(1)
%of
Segment’s
Net Sales $(1)
%of
Segment’s
Net Sales $(1) %
U.S. Consumer ................................... $ 83.2 15.2% $72.7 15.9% $10.5 15%
Education and Training ............................ (0.2) (0.5)% (9.0) (44.9)% 8.8 98%
International ..................................... 26.4 27.4% 7.7 14.4% 18.7 243%
Total Company .................................. $109.5 16.1% $71.4 13.4% $38.1 53%
(1) In millions.
U.S. Consumer. Our U.S. Consumer segment’s income from operations increased by $10.5 million, or 15%,
from $72.7 million in 2002 to $83.2 million in 2003 due largely to strong sales growth. As a percentage of net
sales, income from operations decreased from 15.9% in 2002 to 15.2% in 2003. The decline was primarily due to
lower gross margin, offset by improved expense leverage.
Education and Training. Our Education and Training segment’s loss from operations improved from a loss
of $9.0 million in 2002 to a loss of $0.2 million in 2003. This improvement in operating results was largely due
to strong sales growth, increased gross profit margins and operating expense leverage. We anticipate the sales
growth to continue, and we expect this segment to generate positive income from operations in 2004; however,
we cannot provide any assurances in this regard.
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