LeapFrog 2007 Annual Report Download - page 56

Income (Loss) From Operations
Income (loss) from operations in dollars and the related percentage of segment net sales were as follows:
Year Ended December 31,
2006 2005 Change
Segment $(1)
%of
Segment’s
Sales $(1)
%of
Segment’s
Sales $(1) %
U. S. Consumer .............................. $(110.4) (31.5)% $ (4.9) (1.0)% $(105.5) (2153)%
International ................................. (9.3) (8.1)% 24.9 19.0% (34.2) (137)%
School ...................................... (5.0) (13.5)% 0.9 2.3% (5.9) (654)%
Total Company .............................. $(124.7) (24.8)% $20.9 3.2% $(145.6) (697)%
(1) In millions
We record indirect expenses in our U.S. Consumer segment and do not allocate these expenses to our
International and School segments.
Other
Net Interest Income and Other Income (Expense), Net
Net interest income increased by $3.8 million from $3.4 million in 2005, to $7.2 million in 2006. This
increase was due to higher market interest rates and from increasing the percentage of investments in higher-rate
taxable interest securities in 2006, compared to tax-exempt securities in 2005.
Tax Rate
Our effective tax rate for 2006 was (22.5)% as compared to 26.5% in 2005. The negative tax rate for 2006 is
currently affected by a $60.4 million non-cash valuation allowance recorded against our domestic deferred tax
assets, of which $24.9 million relates to pre-2006 deferred tax assets and earnings being lower or losses being
higher than anticipated in countries, where we have tax rates that are lower than the U.S. statutory rate. See
“Critical Accounting Policies, Judgments and Estimates” for further details on the increase in the valuation
allowance.
Net Income (Loss)
Our net loss for 2006 was $145.1 million as compared to a net income of $17.5 million in 2005 as a result of
the factors described above.
Related Party Transactions
Since 2004, LeapFrog has been a majority-owned subsidiary of Mollusk Holdings, LLC, an entity controlled
by Lawrence J. Ellison. In 2007 and 2006, we purchased software products and support services from Oracle
Corporation in an arms length agreement totaling $0.5 million and $0.4 million, respectively. Lawrence J.
Ellison, the Chief Executive Office of Oracle Corporation, may be deemed to have or share the power to direct
the voting and disposition, and therefore, to have beneficial ownership of approximately 16.6 million shares of
our Class B common stock, which represents approximately 53.0% of the combined voting power of our Class A
common stock and Class B common stock as of December 31, 2007 and 2006.
In 2007 and 2006, we paid Pillar Data Systems, Inc. $0.3 million in each of those two years in arms length
transactions for equipment fees. Lawrence J. Ellison is the majority stockholder of Pillar Data Systems, Inc.
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