LeapFrog 2003 Annual Report Download - page 42

Selling, general and administrative expenses for our International segment increased $5.0 million or 180%
from 2001 to 2002. As a percentage of net sales, this expense decreased from 16.9% in 2001 to 14.4% in 2002.
The dollar increase in these expenses was largely related to increased personnel and legal set up costs associated
with our operations in Canada and Europe.
Research and Development Expenses
Research and development expenses increased by $16.0 million, or 42%, from $38.4 million in 2001 to
$54.4 million in 2002. As a percentage of net sales, research and development expenses decreased from 12.2% in
2001 to 10.2% in 2002.
Content development expenses increased by $14.1 million, or 95%, from $15.0 million in 2001 to $29.1
million in 2002. As a percentage of net sales, content development expenses increased from 4.8% in 2001 to
5.5% in 2002. The increase was largely related to the development of an expanded assortment of interactive
books, activity sheets, chapter outlines and test questions for use with our existing and new platforms.
We capitalized $3.6 million of content development expense in 2002 as compared to $5.0 million in 2001.
This decrease in content development expense capitalization is due to the reduction of the use of outside
developers whose costs are capitalized. We had $0.3 million in website development expenses capitalized in
2002 compared to $3.1 million in 2001. The development work for our current website has been largely
completed and we do not anticipate capitalizing further website development expenses.
Product development and engineering expenses increased by $1.9 million, or 8%, from $23.4 million in
2001 to $25.3 million in 2002. As a percentage of net sales, product development expenses decreased from 7.5%
in 2001 to 4.8% in 2002. The reduction in the percentage of net sales resulted primarily from increased leverage
of our technology group based in Los Gatos, California, achieved against strong growth in net sales in all
segments. This group performs all hardware and software engineering and all ASIC design for our products.
The bulk of the increase in research and development expense was in our U.S. Consumer segment, which
accounted for 80% of the total increase from 2001 to 2002, and related to increased content development for our
platforms and product development design and engineering related to new products to be launched in 2003.
The research and development expenses in our Education and Training segment, which accounted for 12%
of the total increase from 2001 to 2002, was due to increased development of content and the LeapTrack
assessment system.
The research and development expenses in our International segment, which accounted for 8% of the total
increase from 2001 to 2002, was due to expenses associated with the localization of content to foreign cultures.
Advertising Expense
Advertising expense increased by $26.6 million, or 88%, from $30.1 million in 2001 to $56.7 million in
2002. As a percentage of net sales, advertising expense increased from 9.6% in 2001 to 10.7% in 2002.
Our U.S. Consumer accounted for 81% of the increase in the advertising expense, primarily related to
increases in television advertising and cooperative advertising with our major retailers. The increase in television
advertising expense was due to a substantial increase in media time used in an effort to promote our expanded
product line and strengthen our brand awareness. Co-operative advertising agreements with our major retailers
were expanded in 2002 to increase our advertising exposure to their large customer bases. The increase in our
International segment is related primarily to our television and print advertising spending in the United Kingdom,
which increased 295% from 2001 to 2002.
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