LeapFrog 2007 Annual Report Download - page 55

We classify research and development expense into two categories, product development and content
development. Product development expense reflects the costs related to the conceptual design, engineering and
testing stages of our platforms and stand-alone products. Content development expense reflects the costs related
to the conceptual, design and testing stages of our software and books. These expenses were as follows:
Year Ended December 31,
2006 2005 Change
$(1)
% of Total
Company
Sales $(1)
% of Total
Company
Sales $(1) %
Product development ................................ $24.4 4.9% $26.1 4.0% $(1.7) (7)%
Content development ................................ 30.1 6.0% 26.2 4.0% 3.9 15%
Research and Development ......................... $54.5 10.9% $52.3 8.0% $ 2.2 4%
(1) In millions
Research and development expense increased by $2.1 million for 2006 compared to 2005. In 2006, we
decided to consolidate our office locations, moving our research and development offices from Los Gatos,
California to our corporate headquarters in Emeryville, California, to better align our research and development,
product and marketing activities. In addition, to the costs associated with this relocation, research and
development expense also reflected compensation costs, which increased by approximately $1.4 million
primarily related to stock-based compensation expense under SFAS 123(R). These factors were partially offset
by capitalization of allowable content development costs.
Advertising Expense
The advertising expense in dollars for each segment and the related percentage of the segment’s net sales
was as follows:
Year Ended December 31,
2006 2005 Change
Segment $(1)
%of
Segment’s
Sales $(1)
%of
Segment’s
Sales $(1) %
U. S. Consumer ..................................... $57.1 16.3% $52.5 11.0% $4.6 9%
International ........................................ 17.6 15.4% 17.0 13.0% 0.6 4%
School ............................................. 0.7 1.9% 0.5 1.1% 0.2 40%
Total Company ..................................... $75.4 15.0% $70.0 10.8% $5.4 8%
(1) In millions
Our advertising expense for 2006 was $75.4 million compared to $70.0 million in 2005. We increased our
advertising expenditure to support our efforts to reduce retailer and LeapFrog inventory levels.
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 decreased year-over-year by $0.3 million, or 3.0%, from $10.1
million in 2005, to $9.8 million in 2006. As a percentage of net sales, depreciation and amortization expense
increased from 1.6% in 2005 to 2.0% in 2006. The decrease in depreciation and amortization expense was
primarily due to lower amortization expense for intangible assets some of which were fully amortized during the
year.
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