LeapFrog 2003 Annual Report Download - page 45

Liquidity and Capital Resources
LeapFrog’s primary sources of liquidity in 2003 and 2002 have been:
•Financing activities: primarily proceeds from our initial public offering of Class A common stock in
July 2002, and from exercise of stock options and employee stock purchase plan; and
•Cash flows generated from operating activities primarily resulting from increased net income.
Prior to our IPO, we relied on our long term secured credit facility with Foothill Capital Corporation to fund
our operations. On July 30, 2002, upon completion of our initial public offering we repaid the entire outstanding
balance of $34.1 million under this credit facility. On October 28, 2002, we formally terminated this facility.
On December 31, 2002, we entered into a $30.0 million three year unsecured senior credit facility, with an
option to increase the facility to $50.0 million, for working capital purposes. The agreement requires that we
comply with certain financial covenants, including the maintenance of a minimum quick ratio on a quarterly
basis and a minimum level of EBITDA on a rolling quarterly basis. We were in compliance with these covenants
at December 31, 2003. The level of a certain financial ratio maintained by us determines interest rates on
borrowings. The interest rate will be between prime and prime plus 0.25% or LIBOR plus 1.25% and LIBOR
plus 2.00%. We had outstanding letters of credit of $0.3 million at December 31, 2003 and $1.4 million at
December 31, 2002. At December 31, 2003, $29.7 million of unused borrowings were available to us.
We typically commit to inventory production, content development and advertising expenditures prior to the
peak third and fourth quarter retail selling season. In addition, our accounts receivable balance typically peaks in
the third and fourth quarters, and most of these accounts receivable are not due for payment until the fourth
quarter or the subsequent year. As a result, cash flow from operating activities is strongest in the first and fourth
quarters of the year.
Quarterly cash flow from operating activities were as follows:
Cash Flow From Operating
Activities
2003 (1) 2002 (1) 2001 (1)
1st Qtr ............................................ $50.1 $ 40.7 $ 3.4
2nd Qtr ........................................... (1.4) (1.5) (16.2)
3rd Qtr ........................................... (34.0) (34.0) (22.2)
4th Qtr ............................................ 12.1 17.3 (0.4)
Total ............................................. $26.8 $ 22.5 $(35.3)
(1) In millions.
Operating activities
Net cash provided by operating activities was $26.8 million in 2003 compared to $22.5 million in 2002. Net
cash used in operating activities was $35.3 million in 2001. The $4.3 million increase in net cash provided by
operating activities from 2002 to 2003 was primarily due the following factors:
•Our inventory balances increased at a lower rate from 2002 to 2003, an increase of $6.4 million,
compared to $38.4 million from 2001 to 2002. Our inventory balances were adequate in supporting our
sales growth in 2003, as reflected by the year-over-year sales growth in all our segments. We believe
that our inventory is at an adequate level to support our continued growth in the first half of 2004.
•The $29.2 million, or 67%, growth in net income also contributed to the improvement of net cash
provided by operating activities. Net income increased primarily due to increased sales and operating
expense leverage achieved in 2003 compared to 2002.
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PART II