LeapFrog 2004 Annual Report Download - page 29

expenses consist primarily of costs associated with content development, product development and product
engineering. Our advertising expenses consist primarily of television advertising, cooperative advertising and in-
store displays. Depreciation and amortization expenses consist primarily of depreciation of fixed assets and
capitalized website development and amortization of intangibles, however it excludes depreciation of
manufacturing tools and capitalized content development, which are classified in cost of sales.
LeapFrog Realignment Plan
In the first quarter of 2005, we announced a three-pronged company-wide realignment initiative designed to
address the following objectives:
• Restore profitability;
• Strengthen our infrastructure and business processes; and
• Generate growth.
Restore profitability.
A necessary part of this objective is a restructuring of our workforce and a reduction of over 180 full-time
and temporary employees in the U.S. Consumer segment and the International segment. We expect headcount
increases in the SchoolHouse division to partially offset these reductions. The costs of the restructuring will be
$2.0 million to $3.0 million, to be recognized in the first quarter of 2005. Through these actions, together with
other cost containment efforts, we are targeting savings of $35 million to $40 million, excluding the impact of
increased expenses for the SchoolHouse division and the impact of changes in accounting for stock options.
In addition to the aforementioned cost reductions, we have also embarked on a deliberate strategy to better
leverage our assets and investments to improve returns. This includes leveraging technology across products and
platforms; utilizing our content assets and development tools across divisions; and realizing the global potential
of the products from the outset of our product development planning cycle to minimize development costs and
maximize sales and profitability.
Strengthen our infrastructure and business processes.
We are focusing efforts on addressing the problems we have experienced in the supply chain by recruiting
employees with supply chain expertise and improving our distribution center for our U.S. Consumer segment and
the related information technology systems. We recently hired a new Chief Information Officer and are searching
for an executive to be in charge of our supply chain. We are also implementing a new company-wide three-year
planning process that will allow us to plan our business and investments over a longer horizon.
An important part of improving our infrastructure and business processes is to address and remediate the
internal control issues that have been identified and discussed elsewhere in this report. See “Item 9A Controls
and Procedures.” This remediation process entails systematically examining each part of the business to improve,
document, and monitor compliance with financial controls. We intend to make the improvements to our internal
control over financial reporting in concert with the actions we are taking to improve the systems used throughout
the company for general business planning and operation. Additionally, we have been, and will continue to,
strengthen the capabilities in organization with the addition of individuals with the capability to strengthen
internal controls, including the addition of a new Chief Financial Officer, who joined us in November 2004 and a
new Treasurer, who joined us in December 2004.
Generate growth.
As we implement our realignment plan to implement greater business disciplines and processes, we also
intend to seek opportunities to generate growth over the long-term. We intend to achieve this goal by targeting
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