LeapFrog 2008 Annual Report Download - page 40

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OPERATING EXPENSES
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related employee
benefits including stock-based compensation expense and other headcount-related expenses associated with executive
management, finance, legal, IT, facilities, human resources, other administrative headcount, rent, legal and other
professional fees, indirect selling expenses, marketing expenses, systems costs, rent, office equipment and supplies.
2008 2007 2006
% Change
2008 vs.
2007
% Change
2007 vs.
2006
(Dollars in millions)
SG&A expense ............................... $115.4 $141.6 $131.9 -19% 7%
As a percent of net sales ........................ 25% 32% 26% (7) 6(1)
(1) Percentage point change
Fiscal Year 2008 Compared to Fiscal Year 2007
SG&A expenses decreased during 2008 reflecting decreased headcount-related expenses and decreased
legal fees and settlement expenses, offset slightly by higher bad debt expense and restructuring charges. Attrition
and workforce reductions implemented during 2008 resulted in full time headcount declining 26% year-over-
year. Legal fees and legal settlement expenses declined significantly due to the settlement reached in a patent
lawsuit in 2007.
The 2008 decrease in employee-related expenses was partially offset by fourth quarter restructuring charges
of $3.9 million, comprising $1.5 million in one-time termination benefits and $2.4 million in costs associated
with vacating space in Austin, Texas and part of our Emeryville, California facilities. Bad debt expense increased
by $5.3 million in 2008 due to the escalating number of retailer bankruptcies in the US and the overall weakening
financial environment in the fourth quarter of 2008.
Fiscal Year 2007 Compared to Fiscal Year 2006
In 2007, SG&A expenses increased by 7%, primarily due to $11.4 million in legal and settlement costs
incurred in connection with a patent lawsuit. The higher legal and settlement costs were partially offset by a net
reduction of $1.6 million in employee-related expenses, attributable primarily to reductions in force specifically
related to the team selling to the school channel.
Selling, general and administrative expenses are expected to decline further in 2009 due to continued efforts
to manage costs.
Research and Development Expenses
Research and development, or R&D, expenses consist primarily of salaries, employee benefits, stock-based
compensation and other headcount-related expenses associated with content development, product development,
product engineering, third-party development and programming and localization costs to translate content for
international markets. We capitalize external third-party costs related to content development. These costs are
subsequently amortized into cost of sales in the statements of operations.
2008 2007 2006
% Change
2008 vs.
2007
% Change
2007 vs.
2006
(Dollars in millions)
R&D expense ................................... $48.5 $59.4 $54.5 -18% 9%
As a percent of net sales ........................... 11% 13% 11% (2) 2(1)
(1) Percentage point change
30