LeapFrog 2005 Annual Report Download - page 57

Inventory
Inventory increased to $169.1 million at December 31, 2005 from $131.2 million at December 31, 2004.
Inventories consisted of the following:
December 31,
2005 (1) 2004 (1) Change (1)
Raw materials ............................................ $ 32.0 $ 40.1 $ (8.1)
Work in process .......................................... 11.2 6.1 5.1
Finished goods ........................................... 150.6 103.1 47.5
Reserves ................................................ (24.7) (18.1) (6.6)
Inventories, net ........................................... $169.1 $131.2 $37.9
(1) In millions.
The $37.9 million increase in our net inventory balance is primarily related to:
• Major challenges in adjusting production flow to changes in shipment levels on a timely basis.
Production was based on significantly higher forecasted sales volumes than those actually achieved.
• Significant operational difficulties associated with inventory planning and logistics in our international
markets.
Phase II of our Oracle 11i enterprise resource planning implementation should assist in improving these
processes.
These factors were partially offset by a $6.7 million increase in allowances for shrinkage and obsolete and
excess inventory. The transition to a turnkey mode of operations reduced raw materials by $30.0 million. Going
forward, we expect our turnkey operations, as well as other changes in our supply change operations, to reduce
but not eliminate, our raw material and work-in-progress balances.
Prepaid expenses and other current assets
Prepaid expenses and other current assets increased by $8.0 million at December 31, 2005, from
$13.3 million at December 31, 2004. The increase was primarily due to the payment of advances against
royalties.
Deferred income taxes
Deferred tax assets relate primarily to net operating loss, tax credit carryforwards and expenses not yet
deductible for tax purposes. We recorded current deferred tax assets of $10.7 million and $25.0 million, and
non-current deferred tax assets of $16.6 million and $6.6 million at December 31, 2005 and 2004, respectively.
Current deferred tax assets decreased due to the receipt of a tax refund of $8.5 million in the fourth quarter of
2005. Long-term deferred tax assets increased due to additional research and development credits available to be
carried forward in future periods.
Accounts payable
Accounts payable increased to $74.3 million at December 31, 2005 from $62.8 million at December 31,
2004. The $11.5 million increase in accounts payable was primarily due to the growth of our business and the
increase in inventory levels in the fourth quarter of 2005 compared to the same period in 2004.
Accrued liabilities
Accrued liabilities decreased to $43.8 million at December 31, 2005 from $53.9 million at December 31,
2004. The $10.1 million decrease in accrued liabilities was primarily due to a $3.7 million decrease in accrued
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