LeapFrog 2009 Annual Report Download - page 37

Operating expenses decreased 31% in 2009 as compared to 2008, primarily due to reduced headcount, reductions
in advertising, and lower bad debt expense. The number of total fulltime employees declined by 85, or 14%, from
December 31, 2008 to December 31, 2009, due to a combination of reductions in force and the migration of
certain aspects of our product development cycle to external parties. Advertising expense declined by 42%,
driven by a reduction in the amount of television-based advertising and fewer new platform launches as
compared to 2008. Finally, bad debt expense declined by $6.2 million, as the economy began to stabilize and
fewer retailers declared bankruptcy as compared to 2008.
Basic and diluted net loss per share improved by $1.03 or 96% in 2009 as compared to 2008, reflecting primarily
the decrease in our total net loss as well as a favorable tax benefit of $7.2 million in connection with the release
of tax reserves based on expired statutes of limitations. The weighted average of basic and diluted common
shares outstanding remained relatively level.
Fiscal Year 2008 Compared to Fiscal Year 2007
Net sales for 2008 increased by 4% from those recorded in 2007, primarily driven by the launch of several new
product platforms including Tag, Leapster2 and Didj, the positive effect of which was partially offset by
declining sales of our older products, some of which were being retired. Net sales for 2008 included a positive
impact from changes in currency exchanges rates of one percentage point. Net sales related to new platform
products and related content introduced in 2008 totaled approximately $121.2 million, or 26% of total net sales.
Gross margin percentage improved slightly in 2008 as compared to 2007 as new products launched in 2008
generally had higher margins and we did not experience the same level of asset write-offs as in 2007.
Specifically, the large unamortized balances of the FLY Fusion-related assets were written down to reflect
declining sales trends in 2007. These improvements to gross margin were partially offset by lower sales through
the school channel, increased discounting, higher sales returns allowances related to weakening consumer
demand and higher than expected retail inventory levels at the end of 2008, and costs associated with a voluntary
recall of the Didj recharging station.
Operating expenses declined 12% in 2008 as compared to 2007 reflecting reduced headcount-related expenses
and the absence of costs for legal settlements, offset slightly by an increase in bad debt expense. Over the past
three years we have focused on reducing our cost structure through driving efficiencies. Total fulltime employees
declined by 218, or 26%, from December 31, 2007 to December 31, 2008, due to a combination of reductions in
force and the migration of certain aspects of our product development cycle to external parties. Legal costs were
considerably lower in 2008 as 2007 included $11.4 million in patent defense and settlement expenses associated
with a patent lawsuit. Bad debt expense increased by $5.3 million in 2008 due to several customer bankruptcies
as well as an increase in the allowance for doubtful accounts given the weakening retail environment.
Our basic and diluted net loss per share improved by $0.55 in 2008 as compared to 2007 due primarily to the
decrease in our total net loss, as the weighted average of basic and diluted common shares outstanding remained
relatively level.
2010 Outlook
We expect continued, albeit modest, economic improvement in 2010, which should drive increased retail
spending and stronger retail sales growth than we experienced in 2009. We believe additional factors, such as
lean year-end 2009 retail inventory levels, our ability to leverage our Learning Path, new product introductions
across all categories, and our entry into new distribution channels should accelerate 2010 net sales
growth. Further, we expect that additional software-based content sales and our lower cost structure will result in
positive operating income for 2010. However, our expectations for 2010 sales growth and operating income are
subject to many uncertainties, including the timing and strength of any economic recovery and many other
factors described below under “Risk Factors” in Item 1A of this Form 10-K, there can be no assurance that
consumer demand for our products will improve in 2010 compared to 2009.
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