LeapFrog 2004 Annual Report Download - page 86

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
1. Description of Business
LeapFrog Enterprises, Inc. (the “Company”), formerly known as Knowledge Kids Enterprises, Inc., is a
designer, developer and marketer of technology-based educational products and related proprietary content,
dedicated to making learning effective and engaging. The Company currently designs its products to help infants
and toddlers through high school students learn age- and skill-appropriate subject matter, including phonics,
reading, writing, math, spelling, science, geography, history and music. The Company’s product line includes: (1)
learning platforms, which are portable hardware devices, (2) educational software-based content, such as interactive
books and cartridges, specifically designed for use with the Company’s learning platforms and (3) stand-alone
educational products. The Company’s products are sold throughout the United States primarily by national and
regional mass-market and specialty retailers, and, to a lesser extent, into international markets and to U.S. schools.
Based on voting control, the Company was a subsidiary of Knowledge Universe, LLC until April 2003, and
from April 2004, the Company was a subsidiary of Mollusk Holdings, LLC.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries, primarily those organized in the United Kingdom, Canada, Macau (which includes Hong Kong),
France and Mexico. Intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts in the financial statements for prior years have been reclassified to conform to the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions affecting the amounts reported in the
financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue upon shipment of its products, provided that there are no significant post-
delivery obligations to the customer and collection is reasonably assured. The Company provides for discounts,
sales returns and allowances, including allowances for defective returns. Sales allowances may vary as a
percentage of gross sales due to changes in the Company’s product mix, defective product allowances or other
sales allowances. Sales returns and allowances were $136,441, $88,450 and $62,418 for the years ended
December 31, 2004, 2003 and 2002, respectively. Actual amounts for returns and allowances may differ from the
Company’s estimates and such differences could be material to the consolidated financial statements.
The revenue and related cost for the Company’s products whose sole purpose is Internet connectivity,
principally the Mind Station connector, which has generally been packaged with other products, is recognized
over a period of 12 to 18 months, based on an estimated period of use of the product. If the Company changes its
estimate of the period of use, revisions to the revenue recognition may be required. The Company also defers
revenue on SchoolHouse training until performed and on subscriptions until earned. At December 31, 2004 and
2003, and 2002, the Company had deferred revenue and related cost of $364, $1,416 and $3,006, respectively. In
the year ended December 31, 2004 and 2003, and 2002, previously deferred revenue totaling $1,851, $3,163 and
$2,302, respectively, was recognized.
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