LeapFrog 2004 Annual Report Download - page 43

The dollar increase was primarily due to higher salaries and benefit expenses, offset by lower litigation and
incentive compensation expenses as follows:
• Salaries and related employee benefits were higher than in 2002 by $11.8 million, primarily due to the
emphasis on building internal sales and marketing teams and infrastructure to support our worldwide
expansion;
• Litigation expenses decreased by $9.4 million compared to 2002 primarily due to the settlement in the
first half of 2003 of a number of outstanding legal proceedings that had been active throughout most or
all of 2002; and
• Incentive compensation expense decreased by $2.7 million compared to 2002 as a result of reduced
bonuses.
Selling, general and administrative expenses for our International segment increased $3.2 million, or 42%,
from 2002 to 2003. As a percentage of net sales, this expense decreased from 14.4% in 2002 to 11.3% in 2003.
The dollar increase in these expenses was largely related to higher fixed compensation expenses resulting from
our operations in Europe, Canada and Asia.
Selling, general and administrative expenses for our Education and Training segment increased by $3.2
million or 24% from 2002 to 2003. As a percentage of net sales, this expense decreased from 65.3% in 2002 to
43.6% in 2002. The dollar increase in these expenses was primarily due to higher salaries and sales commissions
expenses resulting from our substantial investment in our own direct sales force, offset by lower direct marketing
and consulting expenses.
Research and Development Expenses
Research and development expenses increased by $3.2 million, or 6%, from $54.4 million in 2002 to $57.6
million in 2003. As a percentage of net sales, research and development expenses decreased from 10.2% in 2002
to 8.5% in 2003. The reduction in the percentage of net sales was primarily achieved through strong net sales
growth in all segments and increased leverage of our internal software and platform development groups. The
increased expenses year-over-year were due to higher spending in our U.S. Consumer and International
segments, offset by lower spending in our Education and Training segment as follows:
• The increase in the U.S. Consumer and International segments was primarily due to the increased
development of content for existing platforms and the development of three new platforms and their
related content.
• The expense increase in our International segment was due to the localization of existing content to
international cultures.
• The development of the current generation of platforms in our Education and Training segment was
largely completed in 2002. Thus the spending in 2003 was only related to the refresh of existing content
and development of new content.
Content development expenses increased by $1.9 million, or 6%, from $29.1 million in 2002 to $31.0
million in 2003. As a percentage of net sales, content development expenses decreased from 5.5% in 2002 to
4.6% in 2003. Spending on development of software content increased by 6% year-over-year primarily due to the
development of content for our new line of platforms and an expanded assortment of content for our existing line
of platforms.
Product development and engineering expenses increased by $1.3 million, or 5%, from $25.3 million in
2002 to $26.6 million in 2003. As a percentage of net sales, product development expenses decreased from 4.8%
in 2002 to 3.9% in 2003. Spending on the development and engineering of new platforms and stand-alone
products increased by 25% year-over-year while website engineering expenses decreased by 78%. The increase
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