LeapFrog 2004 Annual Report Download - page 44

in new product development was primarily due to the development expenses for our LeapPad Plus Writing,
LittleTouch LeapPad and Leapster platforms, each of which were launched in 2003. We largely completed the
development and engineering of our website in 2002, and the expenses related to the maintenance of the website
are classified as selling, general and administrative expenses beginning in the second quarter of 2003.
Advertising Expense
Advertising expense increased by $17.0 million, or 30%, from $56.7 million in 2002 to $73.8 million in
2003. As a percentage of net sales, advertising expense increased from 10.7% in 2002 to 10.8% in 2003. Our
U.S. Consumer and International segments accounted for the entire increase in the advertising expense.
The increase in advertising expense was primarily related to increases in television advertising. The increase
in television advertising expense was due to a substantial increase in media time used in an effort to strengthen
our brand awareness and promote our expanded product line, including the introductions of our Leapster,
LeapPad Plus Writing and LittleTouch LeapPad platforms. The increase in our International segment was related
primarily to our television and print advertising spending in the United Kingdom and Canada.
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 $1.0 million, or 16%, from $6.6 million in 2002, to
$7.7 million in 2003. As a percentage of net sales, depreciation and amortization expense decreased from 1.3% in
2002 to 1.1% in 2003.
The increase in the depreciation and amortization expense is primarily due to higher depreciation expense of
computers and software purchased to support our worldwide expansion, offset by lower amortization of website
development expenses. Our original website was fully amortized in August 2003.
Income (Loss) From Operations
Our income from operations increased by $38.1 million, or 53%, from $71.4 million in 2002 to $109.5
million in 2003. As a percentage of net sales, our income from operations increased from 13.4% in 2002 to
16.1% in 2003. The improvement was primarily due to increased sales and operating expense leverage.
Income (loss) from operations in dollars and the related percentage of segment net sales were as follows:
Year Ended December 31,
2003 2002 Change
Segment $(1)
%of
Segment’s
Net Sales $(1)
%of
Segment’s
Net Sales $(1) %
U.S. Consumer ..................... $ 83.2 15.2% $72.7 15.9% $10.5 15%
International ....................... 26.4 27.4% 7.7 14.4% 18.7 243%
Education and Training .............. (0.2) (0.5)% (9.0) (44.9)% 8.8 98%
Total Company .................... $109.5 16.1% $71.4 13.4% $38.1 53%
(1) In millions.
U.S. Consumer. Our U.S. Consumer segment’s income from operations increased by $10.5 million, or 15%,
from $72.7 million in 2002 to $83.2 million in 2003 due largely to strong sales growth. As a percentage of net
sales, income from operations decreased from 15.9% in 2002 to 15.2% in 2003. The decline was primarily due to
lower gross margin, offset by improved expense leverage.
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