LeapFrog 2004 Annual Report Download - page 39

The increase in advertising expense was primarily related to increases in cooperative advertising of $3.9
million, television advertising of $3.1 million, and catalog expenses of $2.2 million as follows:
• Higher cooperative advertising costs in Canada and the United Kingdom with our major retailers;
• Higher television advertising primarily in the United Kingdom and Canada, and to a lesser extent, in the
United States; and
• Higher spending related to the printing and distribution of our consumer and SchoolHouse catalogs.
Looking at selling, general and administrative expenses, research and development expenses, and
advertising expenses in the aggregate, we expect that our operating expenses will decline as a percentage of net
sales in 2005, due primarily to our company-wide realignment plan. The impact of the realignment plan targets
expense reductions in our U.S. Consumer and International segments. We anticipate the operating expenses for
our Education and Training segment to increase, primarily due to costs associated with the anticipated growth in
this business segment.
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 $0.3 million, or 3%, from $7.7 million in 2003, to $8.0
million in 2004. As a percentage of net sales, depreciation and amortization expense increased from 1.1% in
2003 to 1.2% in 2004.
The increase in the depreciation and amortization expense primarily resulted from:
• Higher depreciation expense for computers and software;
• Increased amortization of intangible assets primarily related to a technology license purchased in 2004;
and
• Lower amortization of website development expenses. Our original website design and development
was fully amortized in August 2003.
Income (Loss) From Operations
Income (loss) from operations in dollars and the related percentage of segment net sales were as follows:
Year Ended December 31,
2004 2003 Change
Segment $(1)
%of
Segment’s
Net Sales $(1)
%of
Segment’s
Net Sales $(1) %
U.S. Consumer .................. $(49.9) (11.5)% $ 83.2 15.2% $(133.1) (160)%
International .................... 24.9 16.3% 26.4 27.4% (1.5) (6)%
Education and Training ........... 10.9 19.8% (0.2) (0.5)% 11.1 NA
Total Company $(14.0) (2.2)% $109.5 16.1% $(123.4) (113)%
(1) In millions.
U.S. Consumer. The decline in operating income was primarily due to sales declines, lower gross margins,
and to a lesser extent, an increase in operating expenses.
International. The operating income decrease was largely due to lower gross profit percentage and, to a
lesser extent, increased operating expenses, partially offset by higher net sales and favorable foreign exchange
translation. Foreign currency exchange rates favorably impacted our International segment’s operating income by
$1.9 million or 8% in 2004. The favorable currency impact was due to the strengthening of the British Pound and
the Canadian Dollar.
Education and Training. The improvement in operating results was due to strong sales growth.
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