LeapFrog 2006 Annual Report Download - page 79

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
1. Description of Business
LeapFrog Enterprises, Inc. (the “Company”), creates and markets products which make learning fun with
connected, innovative technology that teaches and engages in the world’s largest markets. The Company designs
and develops technology-based educational platforms with curriculum interactive software content and stand-
alone products. These products are for sale through retailers, distributors and directly to schools. The Company
operates three business segments namely U.S. Consumer, International, and SchoolHouse (formerly referred to as
“Education and Training”). To date, the Company has established its brands and products primarily for children
up to age 12 in the U.S. retail markets and in a number of international retail markets. Sales in the U.S. Consumer
and International segments, the largest business segments, currently are generated in the toy aisles of retailers.
Sales of products in the SchoolHouse segment are predominantly to educational institutions.
Based on voting control, the Company is 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, Mexico and China. 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 when products are shipped and title passes to the customer provided that
there are no significant post-delivery obligations to the customer and collection is reasonably assured. Net sales
represent gross sales less negotiated price allowances based primarily on volume purchasing levels, estimated
returns, allowances for defective products, markdowns, and other sales allowances for customer promotions.
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, discounts and allowances were $132,343,
$117,226 and $136,441 for the years ended December 31, 2006, 2005 and 2004, respectively. Actual amounts for
returns and allowances may differ from the Company’s estimates.
Allowances for Accounts Receivable
The Company reduces accounts receivable by an allowance for amounts it believes will become
uncollectible. This allowance is an estimate based primarily on management’s evaluation of the customer’s
financial condition, past collection history and aging of the accounts receivable balances.
F-7