LeapFrog 2011 Annual Report Download - page 41

Gross margin for 2010 decreased 5.5 percentage points as compared to 2009. The decrease was primarily
driven by higher shipping costs and an increased use of discounts, partially offset by higher sales relative to
fixed warehousing expense. In addition, the gross margin in 2009 benefited from an inventory-related
adjustment resulting in a higher than usual gross margin.
Income from operations for 2010 increased 7% as compared to 2009. The increase was primarily driven by an
increase in net sales, partially offset by lower gross margin for 2010 as compared to 2009.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Cash and cash equivalents totaled $71.9 million and $19.5 million at December 31, 2011 and 2010,
respectively. The increase in cash balance was due to an increase in net sales as well as timelier cash
collection from our customers. In line with our investment policy, all cash equivalents were invested in high-
grade money market funds at December 31, 2011.
As of December 31, 2011, we held $2.7 million, stated at fair value, in long-term investments in ARS. Due to
the illiquidity of these investments, we have not included and do not intend, for the foreseeable future, to
include them as potential sources of liquidity in our future cash flow projections. Thus, we do not anticipate
that future declines in value, if any, will have an adverse impact on our future ability to support operations
and meet our obligations as they come due.
We have an asset-backed revolving credit facility (the ‘‘revolving credit facility’’), which is discussed in more
detail below, with a potential borrowing availability of $75.0 million. There were no borrowings outstanding
on this line of credit at December 31, 2011.
We do not expect our accumulated deficit of $162.5 million at December 31, 2011 to be indicative of our
future ability to generate cash flow, given our anticipated cash flows from operations and the availability of
our revolving credit facility.
Future capital expenditures are primarily planned for new product development and purchases related to the
upgrading of our information technology capabilities. We expect that capital expenditures in 2012, including
those for capitalized content and website development costs, will be funded with cash flows generated by
operations. Capital expenditures were $19.9 million for 2011, $22.5 million for 2010 including a $5.4 million
purchase of intangible assets, and $14.6 million for 2009, which included a $0.2 million purchase of
intangible assets.
We believe that cash on hand, cash flow from operations and amounts available under our revolving credit
facility will provide adequate funds for our foreseeable working capital needs and planned capital expenditures
over the next twelve months. Our ability to fund our working capital needs and planned capital expenditures,
as well as our ability to comply with all of the financial covenants of our revolving credit facility, depend on
our future operating performance and cash flows, which in turn are subject to prevailing economic conditions.
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