UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-31396
LeapFrog Enterprises, Inc.
(Exact Name of Registrant, As Specified in its Charter)
| Delaware | 95-4652013 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
6401 Hollis Street, Suite 150, Emeryville, California 94608-1071
(Address of Principal Executive Offices, Including Zip Code)
Registrant’s Phone Number, Including Area Code: (510) 420-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of Class A common stock, par value $0.0001, and Class B common stock, par value $0.0001, outstanding as of April 30, 2004, was 31,684,384 and 27,881,497, respectively.
Part I
Financial Information
| Page | ||||
| Item 1. |
Financial Statements and Notes (Unaudited) |
|||
| Consolidated Balance Sheets at March 31, 2004, March 31, 2003 and December 31, 2003 |
1 | |||
| Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003 |
2 | |||
| Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 |
3 | |||
| 4 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
8 | ||
| Item 3. |
26 | |||
| Item 4. |
26 | |||
| Part II | ||||
| Other Information | ||||
| Page | ||||
| Item 1. |
28 | |||
| Item 6. |
28 | |||
| Signatures |
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| Exhibit Index |
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i
PART 1.
FINANCIAL INFORMATION
| Item 1. | Financial Statements |
LEAPFROG ENTERPRISES, INC.
(In thousands, except per share data)
| March 31, |
December 31, 2003 |
|||||||||||
| 2004 |
2003 |
|||||||||||
| (Unaudited) | (Note 1) | |||||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 126,545 | $ | 107,807 | $ | 69,844 | ||||||
| Short term investments |
74,124 | 20,211 | 42,759 | |||||||||
| Restricted cash |
8,418 | — | — | |||||||||
| Accounts receivable, net of allowances of $14,526, $9,388 and $26,980 at March 31, 2004 and 2003 and December 31, 2003, respectively |
69,170 | 57,989 | 281,792 | |||||||||
| Inventories, net |
115,063 | 81,872 | 90,897 | |||||||||
| Prepaid expenses and other current assets |
8,821 | 6,923 | 8,370 | |||||||||
| Deferred income taxes |
18,774 | 9,671 | 11,735 | |||||||||
| Total current assets |
420,915 | 284,473 | 505,397 | |||||||||
| Property and equipment, net |
20,923 | 20,541 | 20,547 | |||||||||
| Investments in affiliates and related parties |
— | 200 | — | |||||||||
| Deferred income taxes |
553 | 10,573 | 619 | |||||||||
| Intangible assets |
30,555 | 26,031 | 25,048 | |||||||||
| Other assets |
6,318 | 132 | 1,048 | |||||||||
| Total assets |
$ | 479,264 | $ | 341,950 | $ | 552,659 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable |
$ | 38,607 | $ | 23,237 | $ | 86,161 | ||||||
| Accrued liabilities |
26,294 | 21,201 | 44,634 | |||||||||
| Deferred revenue |
240 | 2,186 | 1,417 | |||||||||
| Income taxes payable |
3,069 | — | 4,729 | |||||||||
| Total current liabilities |
68,210 | 46,624 | 136,941 | |||||||||
| Deferred rent and other long term liabilities |
540 | 573 | 572 | |||||||||
| Deferred income taxes |
31 | 3,344 | — | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity: |
||||||||||||
| Class A common stock, par value $0.0001; 139,500 shares authorized; shares issued and outstanding: 31,651, 22,119 and 31,273 at March 31, 2004 and 2003 and December 31, 2003, respectively. |
3 | 2 | 3 | |||||||||
| Class B common stock, par value $0.0001; 40,500 shares authorized; shares issued and outstanding: 27,883, 33,990 and 27,883 at March 31, 2004 and 2003 and December 31, 2003, respectively. |
3 | 3 | 3 | |||||||||
| Additional paid-in capital |
301,654 | 247,413 | 294,976 | |||||||||
| Deferred compensation |
(1,965 | ) | (4,301 | ) | (2,492 | ) | ||||||
| Accumulated other comprehensive income |
783 | 108 | 828 | |||||||||
| Retained earnings |
110,005 | 48,184 | 121,828 | |||||||||
| Total stockholders’ equity |
410,483 | 291,409 | 415,146 | |||||||||
| Total liabilities and stockholders’ equity |
$ | 479,264 | $ | 341,950 | $ | 552,659 | ||||||
See accompanying notes.
1
LEAPFROG ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net sales |
$ | 71,632 | $ | 76,733 | ||||
| Cost of sales |
39,684 | 36,092 | ||||||
| Gross profit |
31,948 | 40,641 | ||||||
| Operating expenses: |
||||||||
| Selling, general and administrative |
26,769 | 21,521 | ||||||
| Research and development |
13,946 | 14,404 | ||||||
| Advertising |
8,686 | 6,355 | ||||||
| Depreciation and amortization |
1,793 | 1,903 | ||||||
| Total operating expenses |
51,194 | 44,183 | ||||||
| Loss from operations |
(19,246 | ) | (3,542 | ) | ||||
| Interest expense |
(1 | ) | (3 | ) | ||||
| Interest income |
397 | 326 | ||||||
| Other income |
863 | 1,604 | ||||||
| Loss before benefit for income taxes |
(17,987 | ) | (1,615 | ) | ||||
| Benefit for income taxes |
(6,164 | ) | (646 | ) | ||||
| Net loss |
$ | (11,823 | ) | $ | (969 | ) | ||
| Net loss per common share - basic and diluted |
$ | (0.20 | ) | $ | (0.02 | ) | ||
| Shares used in calculating net loss per common share - basic and diluted |
59,373 | 55,162 | ||||||
See accompanying notes.
2
LEAPFROG ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net loss |
$ | (11,823 | ) | $ | (969 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
| Depreciation |
3,755 | 3,706 | ||||||
| Amortization |
493 | 161 | ||||||
| Provision for allowances for accounts receivable |
7,333 | 3,173 | ||||||
| Deferred income taxes |
(6,942 | ) | 631 | |||||
| Deferred rent |
(32 | ) | 23 | |||||
| Deferred revenue |
(1,177 | ) | (820 | ) | ||||
| Amortization of deferred compensation |
481 | 557 | ||||||
| Stock option compensation related to nonemployees |
135 | 220 | ||||||
| Tax benefit from exercise of stock options |
3,179 | 11,194 | ||||||
| Amortization of bond premium |
50 | (18 | ) | |||||
| Other changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
205,289 | 108,508 | ||||||
| Inventories |
(24,166 | ) | 2,588 | |||||
| Prepaid expenses and other current assets |
(451 | ) | (2,539 | ) | ||||
| Notes receivable due from related parties |
— | 276 | ||||||
| Other assets |
(270 | ) | 152 | |||||
| Accounts payable |
(47,554 | ) | (35,606 | ) | ||||
| Accrued liabilities |
(18,340 | ) | (19,332 | ) | ||||
| Income taxes payable |
(1,660 | ) | (21,832 | ) | ||||
| Net cash provided by operating activities |
108,300 | 50,073 | ||||||
| Investing activities: |
||||||||
| Purchases of property and equipment |
(4,131 | ) | (4,009 | ) | ||||
| Purchase of intangible assets |
(6,000 | ) | (3,000 | ) | ||||
| Purchases of short term investments |
(60,854 | ) | (20,193 | ) | ||||
| Sale of short term investments |
16,021 | — | ||||||
| Net cash used in investing activities |
(54,964 | ) | (27,202 | ) | ||||
| Financing activities: |
||||||||
| Proceeds from the payment of notes receivable from stockholders |
— | 2,624 | ||||||
| Proceeds from the exercise of stock options and employee stock purchase plan |
3,410 | 9,042 | ||||||
| Net cash provided by financing activities |
3,410 | 11,666 | ||||||
| Effect of exchange rate changes on cash |
(45 | ) | (57 | ) | ||||
| Increase in cash and cash equivalents |
56,701 | 34,480 | ||||||
| Cash and cash equivalents at beginning of period |
69,844 | 73,327 | ||||||
| Cash and cash equivalents at end of period |
$ | 126,545 | $ | 107,807 | ||||
| Supplemental Disclosure of Cash Flow Information |
||||||||
| Cash paid during the period for: |
||||||||
| Income taxes |
$ | — | $ | 12,746 | ||||
| Amount payable related to technology license |
4,000 | — | ||||||
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
(Unaudited)
| 1. | Basis of Presentation |
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation of the financial position and interim results of LeapFrog Enterprises, Inc. (the “Company”) as of and for the periods presented have been included. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Because the Company’s business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year.
Certain amounts in the financial statements for prior periods have been reclassified to conform to the current period’s presentation.
The balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial information included herein should be read in conjunction with the Company’s consolidated financial statements and related notes in its 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004 (SEC File No. 001-31396).
| 2. | Stock Based Compensation |
The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares on the date of grant. As allowed under the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in the Company’s financial statements in connection with stock options granted to employees where exercise prices are equal to or greater than fair value. Deferred compensation for options granted to employees is determined as the difference between the fair market value of the Company’s common stock on the date options were granted in excess of the exercise price.
Stock-based compensation arrangements with nonemployees are accounted for in accordance with SFAS 123 and EITF No. 96-18, “Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” using a fair value approach. The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned.
For purposes of disclosures pursuant to SFAS 123, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the estimated fair value of options is amortized over the options’ vesting periods. The following table illustrates the effect on net loss and net loss per common share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net loss as reported |
$ | (11,823 | ) | $ | ||||