LeapFrog 2005 Annual Report Download

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Annual Report 2005
A World
of Learning

Table of contents

  • Page 1
    dudrdddudldddrdldrdudrdrdddrdududldrdrdldudldldudldddududrdddddrdddudrdudldddldldudldrdddrdudrdrdrdudldrdldrdldddududldrdudrdrdldddddududrdddldddudddddrdddldldldrdddldudududldldddududddddddddrdldrdldldddudldldudrdrdddudrdrdddldudrdldddudddudududddudrdddldddddldudddddldddldrdrdrdrdudududrdddldududu...

  • Page 2
    ...and growing our business. We have increased headcount in our SchoolHouse division and invested behind information technology, business processes and our supply chain. We also invested in the research and development and marketing of our new products, including our FLY Pentop Computer, Leapster L-MAX...

  • Page 3
    ... our markets this summer. We are also introducing the LeapsterTV learning system globally. This new educational game console has chunky console buttons and an easy-to-use joystick, extending the Leapster brand to three year olds. The new platform works with the Leapster educational software library...

  • Page 4
    ... announced the availability of the new Leapster Portable Technology Center, which is designed specifically for classrooms and after-school programs. We are also currently working with several educational organizations and schools in order to fast track the FLY pentop platform for classroom use...

  • Page 5
    ... (Address of principal executive offices) (510) 420-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Class A common stock, par value $0.0001 per share New York Stock...

  • Page 6
    ...logo are our registered trademarks or our service marks. "FLY," "FLYball," "FLY Through," the FLY logo, "Fridge Phonics," the LeapFrog logo, the LeapFrog SchoolHouse design, "LeapFrog SchoolHouse," "LeapDesk," "LeapMat," "LeapPort," "Leapster," "Leapster L-MAX," "Leapster TV," "Little Leaps," "Learn...

  • Page 7
    ... of Operations ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Other Information ...PART III Item 10 Item 11 Item 12 Item 13 Item 14 Directors and Executive Officers of the Registrant ...Executive Compensation...

  • Page 8
    ... LeapStart learning table, our Fridge Phonics magnetic set products for infants and toddlers, our The Letter Factory video and our Explorer interactive globes for older children. In 1999, we established our Education and Training Group segment. Within this segment, our SchoolHouse division develops...

  • Page 9
    ...'s School of Education, as well as a member of the board of the Society for Scientific Study of Reading. Anne Cunningham, Ph.D. Dr. Cunningham is an associate professor of cognition and development at the University of California, Berkeley and the Director of the Joint Doctoral Program in Special...

  • Page 10
    ... Products We have developed a variety of stand-alone products, learning platforms and a significant library of related content. Our platforms are hardware devices that work with multiple content sets. Our content comes in the form of memory cartridges used in interactive books, handheld video games...

  • Page 11
    ... features designed to offer an enhanced screen-based learning experience. Leapster L-MAX teaches essential skills including math, reading, spelling, science, writing skills, and more. In 2006, we plan on expanding our screen-based portfolio with the LeapsterTV learning system and Little Leaps Grow...

  • Page 12
    ...the United States. In 2006, we plan to add French and Spanish versions of our Leapster learning system. We sell our LeapPad platform to the private education market in Japan through our relationship with Benesse Corporation, a supplemental education materials company, which is currently distributing...

  • Page 13
    ... LeapFrog as Company of the Year in 2004. Our Leapster L-MAX platform was launched in Canada in 2005 and has been named 2006 Toy of the Year by the Canadian Toy Testing Council, or CTTC. Education and Training (SchoolHouse) Our SchoolHouse division, part of our Education and Training group, offers...

  • Page 14
    ... build brand awareness in the education market, including placing advertisements in leading education publications targeting school administrators and teachers, and participating in key education trade shows and events. Sales and Distribution A limited number of customers historically have accounted...

  • Page 15
    ... purchase orders to us as they need product. Based on these purchase orders, we prepare shipments for delivery through various methods. We sell to smaller retail stores through a combination of independent sales representatives and direct salespeople. International Consumer As of December 31, 2005...

  • Page 16
    ... works with our production team to turn our internally developed content into interactive books and software. Finally, this team is responsible for managing the business relationships with our community of third-party developers that are trained to create content for our platforms. Our research and...

  • Page 17
    ... international distributors and customers. The products for our Education and Training segment are shipped directly to our contract warehouse in Chino, California and are later shipped to meet the demands of the educational institutions and educators who purchase our products. Information Technology...

  • Page 18
    ... for better forecasting and inventory plans. Our consumer service and retail sales service teams are managed from our Emeryville, California corporate offices. Competition We compete in the infant-toddler, preschool, and electronic learning aids categories of the U.S. and international toy industry...

  • Page 19
    ... educational material and service providers such as Knowledge Adventure, Compass Learning, PLATO Learning, Inc., Renaissance Learning and Riverdeep Group plc. In the future, large entertainment companies such as Viacom International, Inc. and Walt Disney Co. may begin to target the school markets...

  • Page 20
    ..., Inc. Mr. Kalinske has served as Chairman of the Toy Manufacturers Association of America, and in 1997, he was inducted into the Toy Industry Hall of Fame. He is the non-executive Deputy Chairman of the board of Spring Group plc, an information technology services company in the United Kingdom. 13

  • Page 21
    ...May 2004. Prior to joining us, she served as Vice President of Marketing, Sales, Training and Business Development at The College Board, a non-profit membership association that connects students to college success and opportunity, from 2000 through 2002. From 1996 to 1999, Ms. Woolley-Wilson served...

  • Page 22
    ... and system integrator of information technology products, and served as its Chief Operating Officer from September 2003 through April 2005. From May 2002 to September 2003, Mr. Dodd served as Executive Vice President, Chief Marketing Officer and Chief Operating Officer at Targus Group International...

  • Page 23
    ...In addition, educational curricula change as states adopt new standards. In 2005, we introduced a number of new platforms, stand-alone products, interactive books and other software for each of our three business segments, including our FLY Pentop Computer, which is targeted at an older age group of...

  • Page 24
    ... our shipping costs or cause sales opportunities to be delayed or lost. In order to be able to deliver our merchandise on a timely basis, we need to maintain adequate inventory level of the desired products. If our inventory forecasting and production planning processes result in us manufacturing...

  • Page 25
    ...and internationally. We have more than doubled our net sales from $314.2 million in 2001 and $649.8 million in 2005. During this period, the number of different products we offered at retail also increased significantly, and we have opened offices in Canada, France, Macau and Mexico. We now sell our...

  • Page 26
    ... and Training group, which may not be successful. We launched our Education and Training group in June 1999 to deliver classroom instructional programs to the pre-kindergarten through 8th grade school market and explore adult learning opportunities. To date, the SchoolHouse division, which accounts...

  • Page 27
    ... our technologies or similar technologies to develop competing products, which could weaken our competitive position and harm our operating results. Our success depends in large part on our proprietary technologies that are used in our learning platforms and related software. We rely, and plan to...

  • Page 28
    ... in a highly regulated environment in the U.S. and international markets. U.S. federal, state and local governmental entities regulate many aspects of our business, including products and the importation of products. Such regulations may include accounting standards, taxation requirements, trade...

  • Page 29
    ... internal controls could also cause investors to lose confidence in our reported financial information, which could result in the decrease of the market price of our Class A common stock. One stockholder controls a majority of our voting power as well as the composition of our board of directors...

  • Page 30
    ..., California Hong Kong, China Austin, Texas New York City, New York Distribution Center Distribution Center Distribution Center Headquarters-operations for our three business segments Engineering, research and development Asian administration and logistics Education and Training operations Trade...

  • Page 31
    ... date has been set. LeapFrog Enterprises, Inc. v. Fisher-Price, Inc. and Mattel, Inc. In October 2003, we filed a complaint in the federal district court of Delaware against Fisher-Price, Inc., No. 03-927 GMS, alleging that the Fisher-Price PowerTouch learning system violates United States Patent...

  • Page 32
    ...March 31, 2005 order filed a consolidated complaint. The consolidated complaint alleged that the defendants caused us to make false and misleading statements about our business and forecasts about our financial performance, that certain of our individual officers and directors sold portions of their...

  • Page 33
    ... Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information and Holders Our Class A common stock is listed on the New York Stock Exchange, or the NYSE, under the symbol "LF." There is no established public trading market for the Class B common stock. On...

  • Page 34
    ... our brand and products largely focused on infants, toddlers and children in preschool through grade school and primarily in the U.S. retail market. While we believe that LeapFrog is, first and foremost, an educational products company, we use the toy form and price points to make learning fun...

  • Page 35
    ... 1.5% from 2004 to 2005. Sales growth in our U.S. Consumer segment was partially offset by sales declines in our International and Education and Training segments. The U.S. Consumer business grew primarily due to the introduction of our FLY Pentop Computer and related software and accessories in the...

  • Page 36
    ... targets the pre-kindergarten through 8th grade school market in the United States, including sales directly to educational institutions, to teacher supply stores and through catalogs aimed at educators. The Education and Training segment represented approximately 6% of our total net sales in 2005...

  • Page 37
    ... and monthly operating reviews. We have completed our first three-year strategic plan under this new process. Delivered new products to the market on time and meeting expectations. Both the Leapster L-MAX system and the FLY Pentop Computer were shipped to our retailers on our original time line and...

  • Page 38
    .... Net sales represent gross sales less negotiated price allowances based primarily on volume purchasing levels, estimated returns, allowances for defective products, markdowns and other sales allowances for customer promotions. A small portion of our revenue related to training and subscriptions...

  • Page 39
    ... in subsequent periods, plus a valuation of products we specifically know are either completed or delayed in production beyond the normal lead-time flow. To the extent that actual work-in-process differs from the Company's estimates, inventory and accounts payable may need to be adjusted. Intangible...

  • Page 40
    ...table sets forth selected information concerning our results of operations as a percentage of net sales for the periods indicated: Year Ended December 31, 2005 2004 2003 Net sales ...Cost of sales ...Gross profit ...Operating expenses: Selling, general and administrative ...Research and development...

  • Page 41
    ... of our FLY Pentop Computer and related software and accessories, which began shipping to retail customers in the third quarter of 2005 for our October 2005 product launch. Introduction of our Leapster L-MAX system in the third quarter which added to the increased demand for our screen-based...

  • Page 42
    ... and inventory production planning processes, which caused a few key items to be out of stock in the third and fourth quarters of 2005, resulting in lost sales. Increased competition in our screen-based platforms. These negative factors were partially offset by sales growth in Mexico, Spain...

  • Page 43
    ... and obsolete inventory compared to 2004 when we had higher expense primarily related to raw materials at the factories and slow moving products. These factors were partially offset by increased sales throughout 2005 of our screen-based platforms, which have lower margins, and price reductions on...

  • Page 44
    ... the costs related to the conceptual, design and testing stages of our software and books. These expenses were as follows: Year Ended December 31, 2005 2004 % of % of Net Sales $(1) Net Sales Change $(1) % $(1) Content development ...Product development ...Research and development ...(1) In...

  • Page 45
    ... Our effective tax rate for the year ended December 31, 2005 is 26.5% as compared to 47.6% in 2004. The change in effective tax rate was due to the mix of United States and international pre-tax income in 2005 as compared to 2004, higher research and development tax credits in 2005 and higher exempt...

  • Page 46
    ... of $25,094. In 2004, we reported a pre-tax loss from United States operations of $13,514 and a pre-tax income from our international operations of $1,057. In the event we are unable to generate sufficient income or implement effective tax planning strategies, we would not be able to realize...

  • Page 47
    ... LeapTrack learning system. In addition, our SchoolHouse division experienced strong sales of our interactive content library resulting from successful direct marketing promotions, an overall expansion of a dedicated sales force, and increased product offerings and brand awareness. Gross Profit The...

  • Page 48
    ... Training segment's gross profit percentage year-over-year was primarily due to better net sales leverage achieved as the segment's fixed expenses represent a lower percentage of those sales, partially offset by lower margin ancillary services sold in conjunction with the LeapTrack learning system...

  • Page 49
    ...each segment and the related percentage of our total net sales were as follows: Year Ended December 31, 2004 2003 % of % of Segment's Segment's Net Sales $(1) Net Sales Change Segment $(1) $(1) % U.S. Consumer ...International ...Education and Training ...Total Company ...(1) In millions. $ 82...

  • Page 50
    ... primarily due to the development of our new FLY Pentop Computer platform, Leapster software and the production of new video titles. This increase was partially offset by a decrease in our Education and Training segment primarily due to the timing of the update of the current generation of platforms...

  • Page 51
    ... from Higher depreciation expense for computers and software. Increased amortization of intangible assets primarily related to a technology license purchased in 2004. Lower amortization of website development expenses. Our original website design and development was fully amortized in August 2003...

  • Page 52
    ...specific products at peak demand times, or adversely impacting our own inventory levels by the need to pre-build products to meet the demand. For more information, see "Item 1A.-Risk Factors-Our business is seasonal, and therefore our annual operating results depend, in large part, on sales relating...

  • Page 53
    ... Second Third Fourth Year Ended Quarter Quarter Quarter December 31, (In thousands, except per share data) 2005 Net sales ...$ 71,859 Cost of sales ...44,087 Gross profit ...Operating expenses: Selling, general and administrative ...Research and development ...Advertising ...Depreciation and...

  • Page 54
    ... in 2004 to $9.8 million in 2005. The higher loss was due to lower gross margins resulting from unfavorable segment mix, higher research and development caused by more spending on our new generation of Leapster software titles and additional content for our FLY Pentop Computer, combined with higher...

  • Page 55
    ... be primarily for manufacturing tool purchases for use in the production of both existing and new products and purchases related to the upgrading of our information technology capabilities. Cash and cash equivalents combined with short-term investments declined $16.7 million from 2004 to 2005. The...

  • Page 56
    ... "Item 1.-Business.-Manufacturing, Logistics and Other Operations." Higher inventory levels than in the previous year. Timing of accounts payable payments. • • These factors were partially offset by net income of $17.5 million in 2005 compared to a loss of $6.5 million in 2004. Working Capital...

  • Page 57
    ... flow to changes in shipment levels on a timely basis. Production was based on significantly higher forecasted sales volumes than those actually achieved. Significant operational difficulties associated with inventory planning and logistics in our international markets. Phase II of our Oracle 11i...

  • Page 58
    ... rent, which primarily related to rent escalations at our corporate headquarters in Emeryville, California, and was $1,449 and $1,275 at December 31, 2005 and 2004, respectively. We account for rent expense on a straight line basis over the term of the lease. Investing activities Net cash provided...

  • Page 59
    ... 2003, we purchased software products and support services from Oracle Corporation totaling $0.4 million and $0.6 million, respectively. As of December 31, 2005, Lawrence J. Ellison, the Chairman and Chief Executive Office of Oracle Corporation, may be deemed to have or share the power to direct the...

  • Page 60
    ... purchase price of $0.3 million. We purchased the assets in order to obtain the contents of a children's website developed by Knowledge Kids Network and to benefit from a contract giving us online advertising impressions. In July 2002, we entered into a tax sharing agreement with Knowledge Universe...

  • Page 61
    ... Disclosures About Market Risk. We develop products in the United States and market our products primarily in North America and, to a lesser extent, in Europe and the rest of the world. We are billed by and pay our third-party manufacturers in U.S. dollars. Sales to our international customers are...

  • Page 62
    ... and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and...

  • Page 63
    ... our policies and procedures. Because of the material weakness described in the preceding paragraph, our management believes that, as of December 31, 2005, our internal control over financial reporting was not effective based on the COSO criteria. Our independent registered public accounting firm...

  • Page 64
    ... timely and accurate international data in order to facilitate a more effective monthly close process. Implement process improvements to support timely reconciliation of all major balance sheet accounts on a monthly basis. Work with the information technology organization to ensure that accounting...

  • Page 65
    ... improved with the addition of a new Chief Information Officer, Senior Director Global Network Operations and Senior Director of Information Technology. A comprehensive information technology system strategy has been developed and is aligned with our overall business strategy. We upgraded our ERP...

  • Page 66
    ... Independent Registered Public Accounting Firm The Board of Directors and Stockholders of LeapFrog Enterprises, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that LeapFrog Enterprises, Inc., (the "Company...

  • Page 67
    In our opinion, management's assessment that LeapFrog Enterprises, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, because of the effect of the ...

  • Page 68
    ...will disclose any reportable waivers, if and when granted, of our Code of Business Conduct and Ethics in the corporate governance section of our website located at www.LeapFroginvestor.com. On June 30, 2005, we filed with the NYSE the Annual CEO Certification regarding LeapFrog's compliance with the...

  • Page 69
    ... Plan Information The following table shows certain information concerning our Class A common stock to be issued in connection with our equity compensation plans as of December 31, 2005: Number of securities to be issued upon exercise of outstanding options, awards, warrants and rights (a)(1) Number...

  • Page 70
    ... F-1 below. (2) Financial Statement Schedules: The following financial statement schedule is included as Appendix A of this report: Valuation and Qualifying Accounts and Allowances (3) The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this...

  • Page 71
    ...amendments to this report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every...

  • Page 72
    Signatures Title Date /s/ DAVID C. NAGEL David C. Nagel Director March 7, 2006 /s/ JEFFREY G. KATZ Jeffrey G. Katz Director March 7, 2006 /s/ CADEN WANG Caden Wang Director March 7, 2006 /s/ RALPH R. SMITH Ralph R. Smith Director March 7, 2006 65

  • Page 73
    ... on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of...

  • Page 74
    ... on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of...

  • Page 75
    ... Company's Annual Report on Form 10-K for the year ended December 31, 2005, to which this Certification is attached as Exhibit 32.01 (the "Annual Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and The information...

  • Page 76
    ... Allowance for doubtful accounts receivable Year ended December 31, 2003 ...Year ended December 31, 2004 ...Year ended December 31, 2005 ...Allowance for excess and obsolete inventory Year ended December 31, 2003 ...Year ended December 31, 2004 ...Year ended December 31, 2005 ... 983 1,620 2,519...

  • Page 77
    LEAPFROG ENTERPRISES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Stockholders' Equity ...Consolidated Statements of Cash Flows ......

  • Page 78
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of LeapFrog Enterprises, Inc. We have audited the accompanying consolidated balance sheets of LeapFrog Enterprises, Inc. (the "Company"), as of December 31, 2005 and 2004, and the related consolidated ...

  • Page 79
    ... thousands, except per share data) December 31, 2005 2004 ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Restricted cash ...Accounts receivable, net of allowances of $1,328 and $2,519 at December 31, 2005 and 2004, respectively ...Inventories, net ...Prepaid expenses...

  • Page 80
    LEAPFROG ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2005 2004 2003 Net sales ...Cost of sales ...Gross profit ...Operating expenses: Selling, general and administrative ...Research and development ...Advertising ......

  • Page 81
    ... due to employee termination ...Class A common stock issued upon exercise of stock option and employee purchase plan (1,759 shares) ...Issuance of stock options to nonemployees ...Tax benefit of stock option exercises and other ...Conversion of Class B to Class A shares (269 shares) ...Comprehensive...

  • Page 82
    ...to purchase treasury stock ...Cash used to collateralize letter of credit ...Proceeds from the payment of notes receivable from stockholders ...Proceeds from the exercise of stock options and employee stock purchase plan ...Net cash provided by financing activities ...Effect of exchange rate changes...

  • Page 83
    ... Company currently designs its products to help infants and toddlers through high school students learn age- and skill-appropriate subject matter, including phonics, reading, writing, math, spelling, science, geography, history and music. The Company's product line includes: (1) learning platforms...

  • Page 84
    ...$862 of accumulated amortization related to titles not planned to be sold. The Company capitalizes costs related to the production of home video in accordance with AICPA Statement of Accounting Position No. 00-2, "Accounting by Producers or Distributors of Film." Video production costs are amortized...

  • Page 85
    ... cash and money market funds. Prior to December 31, 2004, the Company classified its auction rate securities as cash and cash equivalents because the securities were highly liquid and the periods between interest rate resets generally did not exceed 90 days. Prior to filing its annual report on Form...

  • Page 86
    ... gains or losses for the years ended 2005, 2004 and 2003. The cost of securities sold is based on the specific identification method. Concentration of credit risk is managed by diversifying investments among a variety of high credit-quality issuers. Inventories Inventories are stated at the lower of...

  • Page 87
    ...for manufacturing tools is included in cost of goods sold. During the years ended December 31, 2005 and 2004, the Company recorded accelerated depreciation of $559 and $785, respectively to write-off certain tooling that will not be used in future periods. The Company capitalizes website development...

  • Page 88
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share and percent data) Stock-Based Compensation The Company's stock-based compensation programs include stock awards, restricted stock units, performance-based equity awards and employee and non-...

  • Page 89
    ..., except per share amounts). Year Ended December 31, 2004 2005 2003 Net income (loss) as reported ...Stock-based employee compensation expense included in reported net income, net of related tax effects ...Total stock-based employee compensation expense determined under fair value method for all...

  • Page 90
    ..."Accounting for stock based compensation". The SEC requires registrants that are not small business issuers to adopt SFAS 123R's fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company plans...

  • Page 91
    ..., short-term investments included certificates issued by various states of the United States totaling $19,350 and $22,688, respectively. 5. Restricted Cash At December 31, 2005, the Company had $150 of restricted cash which was used to collateralize a single standby letter of credit to an insurance...

  • Page 92
    ... standby letters of credit to several of its contract manufacturers and one technology partner. The standby letters of credit guaranteed performance of the obligations of certain of its foreign subsidiaries to pay for trade payables and contractual obligations. The letters of credit, relating to...

  • Page 93
    ...of the Company's voting shares. In April 2004, Knowledge Universe, LLC changed its name to "KU LLC" and in October 2004, KU LLC changed its name to "Krest LLC." In August 2005, the Company entered into a software capital lease agreement for a new enterprise resource planning (ERP) system, Oracle 11i...

  • Page 94
    ... total purchase price of $300. The Company purchased the assets in order to obtain the contents of a children's website developed by Knowledge Kids Network and to benefit from a contract giving the Company online advertising impressions. In July 2002, the Company entered into a tax sharing agreement...

  • Page 95
    ... (In thousands) 10. Accrued Liabilities December 31, 2005 2004 Advertising and promotion ...Royalties payable ...Employee-related costs ...Accrued inventory, manufacturing, and warehousing ...Sales and VAT tax payable ...Research and Development related costs ...Legal fees and settlement costs...

  • Page 96
    ... any material losses on cash equivalents, short-term and long-term investments, and foreign exchange transactions. The Company manufactures and sells its products primarily to national and regional mass-market retailers in the United States. Credit is extended based on an evaluation of the customers...

  • Page 97
    ... these contract manufacturers, who provide similar services to other companies, can source the raw materials more cost-effectively. Customer Concentration A limited number of customers historically have accounted for a substantial portion of the Company's net sales. The significant customers and the...

  • Page 98
    ...tax rate in the year of resolution. The Company believes that the tax accruals reflect the probable outcome of known tax contingencies at this time. Tax benefits of $2,662 and $9,179 related to employee stock options were credited directly to Stockholders' equity in the years ended December 2005 and...

  • Page 99
    ... by Knowledge Universe, Inc. For the years ended December 31, 2005, 2004 and 2003, the Company recorded total expense of $479, $307 and $238 respectively related to the defined contribution plan. 16. Stockholders' Equity Common Stock The Company is authorized to issue 180,000 shares of common stock...

  • Page 100
    ... ten years from the date of grant. The exercise price of the option shall be 100% of the fair market value of a share of Class A common stock on the date the stock option is granted. In April 2004, the Board of Directors approved an amendment to the Plan to increase the aggregate number of shares of...

  • Page 101
    ... of an annual grant of 15 shares, to a Non-Employee Director who holds the position of Chairman of the Company's Board of Directors. Option shares granted will be prorated based on annual service time. Each stock option is exercisable for a period of ten years from the date of grant, no stock option...

  • Page 102
    ... and 2,886 shares, respectively. At December 31, 2005, the total number of shares available under all plans is 3,305. During the years ended December 31, 2004 and 2003, the Company granted options to consultants to purchase 2, and 14 shares of Class A common stock at average exercise prices of $12...

  • Page 103
    ... The following table summarizes the number of shares of Class A common stock that are reserved for future issuance at December 31, 2005. Class A Options and stock awards available and outstanding ...Shares issuable under the Employee Stock Purchase Plan ...Conversion of Class B Common Stock ... 10...

  • Page 104
    ... common equivalent shares related to outstanding stock options and unvested stock (determined using the treasury stock method). 19. Commitments and Contingencies The Company leases office and warehouse space under noncancelable operating leases having initial terms in excess of one year and expiring...

  • Page 105
    ... currently estimable. LeapFrog Enterprises, Inc. v. Fisher-Price, Inc. and Mattel, Inc. In October 2003, the Company filed a complaint in the federal district court of Delaware against FisherPrice, Inc., No. 03-927 GMS, alleging that the Fisher-Price PowerTouch learning system violates United States...

  • Page 106
    ...a class action complaint entitled Miller v. LeapFrog Enterprises, Inc., et al., No. 03-5421 RMW, was filed in federal district court for the Northern District of California against the Company and certain of its current and former officers and directors alleging violations of the Securities Exchange...

  • Page 107
    ... Company designs, markets and sells products primarily in the non-U.S. consumer product market. The Education and Training segment includes the design, production and marketing of educational books and toys sold primarily to school systems. Net Sales Income (Loss) from Operations Total Assets 2005...

  • Page 108
    ...Quarter Second Third Fourth Year Ended Quarter Quarter Quarter December 31, (In thousands, except per share data) 2005 Net sales ...$ 71,859 Cost of sales ...44,087 Gross profit ...Operating expenses: Selling, general and administrative ...Research and development ...Advertising ...Depreciation and...

  • Page 109
    ... Purchase Plan. Form of Offering under the 2002 Employee Stock Purchase Plan. Compensation Arrangements between LeapFrog and its Board of Directors (the description contained under the heading "Compensation of Directors" in LeapFrog's definitive proxy materials filed with the SEC on April 22, 2005...

  • Page 110
    ...company's report on Form 10-Q filed on November 9, 2005 (SEC File No. 001-351396) (h) Incorporated by reference to exhibit number 10.1 previously filed with the company's report on Form 8-K filed on December 14, 2005 (SEC File No. 001-351396) †Compensation plans or arrangements in which directors...

  • Page 111
    ... adjournment thereof. By Order of the Board of Directors Peter M. O. Wong Corporate Secretary Emeryville, California April 26, 2006 You are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please complete, date, sign and return the enclosed proxy...

  • Page 112
    ...stock, or your shares of LeapFrog's Class B common stock were registered directly with LeapFrog, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to fill out and return...

  • Page 113
    ... proxy card but do not make specific choices? If you return a signed and dated proxy card without marking any voting selections, your shares will be voted "For" the election of all eight nominees for director and "For" the proposed amendments to our 2002 Non-Employee Directors' Stock Option Plan and...

  • Page 114
    ... completed proxy card with a later date. You may send a written notice that you are revoking your proxy to LeapFrog's Corporate Secretary at 6401 Hollis Street, Suite 100, Emeryville, California 94608. You may attend the annual meeting and vote in person. Simply attending the meeting will not...

  • Page 115
    ... have no effect. Proposal 4-Ratification of the Selection by the Audit Committee of the Board of Directors of Ernst & Young LLP as the Independent Registered Public Accounting Firm of LeapFrog for Our Fiscal Year Ending December 31, 2006. This proposal must receive a "For" vote from the majority of...

  • Page 116
    ... the election of all members of our board of directors and all other matters submitted to a vote of our stockholders. Mr. Ellison is Chief Executive Officer of Oracle Corporation. Beneficial Ownership of Our Common Stock The following table sets forth certain information regarding the ownership of...

  • Page 117
    ...27,614,176 shares of Class B common stock outstanding as of April 3, 2006. Unless otherwise indicated in the footnotes to this table, the applicable address for each of our directors and executive officers is c/o LeapFrog Enterprises, Inc., 6401 Hollis Street, Suite 100, Emeryville, California 94608...

  • Page 118
    ... Capital has shared voting and dispositive power over 2,498,965 shares. The address for Prentice Capital is 623 Fifth Avenue, 32nd Floor, New York, New York 10022. (10) Includes 319,722 shares of Class A common stock issuable upon the exercise of options that are exercisable within 60 days of April...

  • Page 119
    ..., LLC, Mollusk Holdings, LLC and Michael R. Milken based on the number of shares of LeapFrog's Class B common stock distributed by Krest LLC to each of such three stockholders in September 2005, which may be acquired by Mr. Fink within 60 days of April 3, 2006 upon the exercise of a call option that...

  • Page 120
    ... 22 above, as applicable. Mr. Perez is not included as an executive officer as he was no longer serving as an executive officer of LeapFrog as of April 3, 2006, the date of the information in the table. Includes 82,530 shares of Class A common stock held by our executive officers who are not named...

  • Page 121
    ... and Corporate Governance Committee, recommended to our board that Mr. Katz and Dr. Nagel be appointed to our board of directors. It is LeapFrog's policy to encourage nominees for directors to attend the annual meeting. Five directors attended our 2005 annual meeting of stockholders. Directors are...

  • Page 122
    ... coatings manufacturer. He currently serves as Vice Chairman of Heron International, a European real estate development company. He is a director of Nextera Enterprises, a former provider of economic consulting services that has sold its operating businesses; Nobel Learning Communities, Inc...

  • Page 123
    ...to helping build better futures for disadvantaged children in the United States. Since 2004, Mr. Smith has served on the board of directors of Nobel Learning Communities, Inc., a non-sectarian, for-profit provider of education and educational services for the pre-elementary through 12th grade market...

  • Page 124
    ...management, Chief Executive Officer performance evaluation and succession planning, and board committees and compensation. The Corporate Governance Guidelines were adopted by the board to, among other things, reflect changes to the NYSE listing standards and SEC rules adopted to implement provisions...

  • Page 125
    ... board of directors oversees LeapFrog's corporate accounting and financial reporting process. For this purpose, the Audit Committee performs several functions. Among other things, the Audit Committee: • • evaluates the performance of and assesses the qualifications of the independent registered...

  • Page 126
    ... Exchange Act and Rule 16a-1 thereunder) of LeapFrog, provided that this committee is only authorized to grant stock awards that meet the annual stock award grant guidelines approved by the Compensation Committee, which sets forth the number of shares that may be granted to consultants and employees...

  • Page 127
    ... the current needs of the board and LeapFrog, to maintain a balance of knowledge, experience and capability. In the case of incumbent directors, the Nominating and Corporate Governance Committee reviews such directors' overall service to LeapFrog during their term, including the number of meetings...

  • Page 128
    ... We have adopted the LeapFrog Code of Business Conduct and Ethics that applies to all officers, directors and employees. Our Code of Business Conduct and Ethics and our Corporate Governance Guidelines are available on the investor relations section of our website at www.leapfroginvestor.com...

  • Page 129
    ... Revenue Code. Option grants under the Director Plan are non-discretionary. Upon election to LeapFrog's board of directors, a non-employee director is granted an initial option to purchase 30,000 shares of LeapFrog's Class A common stock. On July 1 of each year (or the next business day if that date...

  • Page 130
    ... determine the number of shares subject to such stock awards. During the fiscal year ended December 31, 2005, our non-employee directors received the following compensation for their service on our board of directors: 2005 Annual Cash Retainer for Service as the Chairman of a Committee or Member of...

  • Page 131
    To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2005, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten ...

  • Page 132
    ...the Audit Committee reviews and evaluates, and discusses and consults with LeapFrog management, LeapFrog internal audit personnel and the independent registered public accounting firm regarding the following the plan for, and the independent registered public accounting firm's report on, each audit...

  • Page 133
    ... the board of directors that the financial statements be included in LeapFrog's 2005 annual report on Form 10-K filed with the SEC. Oversight of Independent Registered Public Accounting Firm The Audit Committee appoints the independent registered public accounting firm and reviews their performance...

  • Page 134
    weaknesses identified in the assessment of internal control over financial reporting as well as significant deficiencies identified to the Audit Committee as part of the assessment. The Audit Committee will receive regular updates from management regarding the remediation ...

  • Page 135
    ... to the company's business opportunities and challenges as owners and not just as employees. LeapFrog generally targets the key elements of executive compensation (base salary, annual bonus opportunity and equity) to deliver compensation to each Section 16 officer and all of them as a group at...

  • Page 136
    ...a small group of LeapFrog employees who had outstanding performance in 2005. The Compensation Committee approved this recommendation and, because LeapFrog did not achieve the threshold financial goal in calendar year 2005 and no bonus award program pool was generated, the Chief Executive Officer and...

  • Page 137
    ...if LeapFrog's Class A common stock appreciates over the long-term. In 2005, the Compensation Committee approved a process whereby employees, including executives, are generally eligible for "new hire" grants upon initial hire, and then annually thereafter based on individual performance. The size of...

  • Page 138
    ...-based grant sized at the median of the competitive survey data. For the performance shares, because LeapFrog did not meet its threshold goals for 2005 on the three annual measures of net income, net sales and operating cash flow (adjusted for current accounts receivable), Mr. Kalinske did not earn...

  • Page 139
    ... that such grants have exercise prices of no less than 100% of fair market value on the date of grant and do not exceed a calendar year limit for the executive officer that is set forth in the 2002 Equity Incentive Plan. LeapFrog generally intends to grant stock options and performance shares to its...

  • Page 140
    EXECUTIVE COMPENSATION Summary Compensation Information The following table shows for 2003, 2004 and 2005, compensation awarded or paid to, or earned by, our Chief Executive Officer and our other four most highly compensated executive officers at December 31, 2005, also referred to as the "named ...

  • Page 141
    ...for performance in 2005. (9) Mr. Bender receives an annual automobile allowance of $7,800. (10) The value of this restricted stock unit award was calculated by multiplying the closing market price of LeapFrog's unrestricted common stock on the date of grant, August 1, 2005 ($12.24), by the number of...

  • Page 142
    ...to purchase 3,328,782 shares remained available for grant under the plan. All stock options were granted at an exercise price equal to their fair market value on the date of grant. The following tables show for the fiscal year ended December 31, 2005, certain information regarding options granted to...

  • Page 143
    ... a result of LeapFrog not meeting the performance goals set by the board of directors for 2005. Due to LeapFrog not meeting its threshold financial goals for 2005, the following number of shares were not earned by our named executive officers for the 2005 period: Name Number of Shares Cancelled Due...

  • Page 144
    ... 25, 2002 (based on the closing price of LeapFrog's Class A common stock on the date on which LeapFrog's Class A common stock began trading on the New York Stock Exchange) through December 31, 2005. (3) This section is not "soliciting material," is not deemed "filed" with the SEC and is not to be...

  • Page 145
    ... of his then-current annual salary, less $67,500, based on LeapFrog's performance and Mr. Kalinske's achievement of performance objectives established in writing by the board of directors. Mr. Kalinske must be an active employee of LeapFrog as of December 31 of the bonus year in order to receive the...

  • Page 146
    ... provided that in the event Mr. Perez's employment terminated within the first three years of his employment with LeapFrog and he sells his Bay Area residence within 12 months after the termination date to an unaffiliated third party for a sale price that is less than his purchase price, he will be...

  • Page 147
    ... receive consulting fees and health insurance premium reimbursement on a monthly basis as set forth in his employment agreement. • Mr. Perez waived his right to continue to vest in stock options covering 47,500 shares of our Class A common stock granted to him in August 2005 with a strike price of...

  • Page 148
    ... for the termination, otherwise have earned in the year of his last day of employment. In addition, all unvested stock options held by Mr. Chiasson will accelerate vesting such that the number of shares that would otherwise vest within a twelve-month period under each option grant will become fully...

  • Page 149
    ... a new enterprise resource planning (ERP) system, Oracle 11i. The total commitment of the lease, which expires on December 31, 2007, is $1,566,000. As of December 31, 2005, Lawrence J. Ellison, the Chief Executive Office of Oracle Corporation, may be deemed to have or share the power to direct the...

  • Page 150
    ...the Director Plan grants to non-employee directors an initial grant of 30,000 shares of our Class A common stock and annual grants of 15,000 shares of our Class A common stock; provided, however, that a non-employee director who holds the position of Chairman of our board of directors at the time of...

  • Page 151
    ... also Chairman of our board at the time of the Annual Grant, such non-employee director will instead receive an Annual Grant to purchase 25,000 shares of our Class A common stock. The number of shares covered by the Annual Grant will be reduced, on a pro rata basis, for each month an individual did...

  • Page 152
    ... us in the event of the non-employee director's cessation of service prior to the vesting of the shares. The exercise price of the options granted under the Director Plan will be equal to the fair market value of the Class A common stock on the date of grant. Class A common stock issued pursuant to...

  • Page 153
    ... Plan, the stock awards automatically granted under the Director Plan, and the class(es) and number of shares and price per share of stock subject to outstanding stock awards will be appropriately adjusted. Change in Control. If the service of a non-employee director is terminated within 12 months...

  • Page 154
    ...any taxable income at the time of issuance, but will have to report as ordinary income, as and when LeapFrog's repurchase right lapses, an amount equal to the excess of (i) the fair market value of the shares on the date the repurchase right lapses, over (ii) the purchase price, if any, paid for the...

  • Page 155
    ... in the year in which the shares subject to that unit are actually vested and issued to the participant in an amount equal to the fair market value of the shares on the date of issuance. Subject to the requirement of reasonableness and the satisfaction of a tax reporting obligation, LeapFrog will be...

  • Page 156
    ... if approved by our stockholders at the annual meeting. Currently, a total of 19,000,000 shares of our Class A common stock is reserved for issuance under the Equity Plan. On March 27, 2006, the Compensation Committee of our board of directors approved an amendment and restatement of our Equity...

  • Page 157
    ... stock unit award. No person may be granted awards under the Equity Plan covering more than 2,000,000 shares of Class A common stock in any calendar year. Shares may be issued in connection with a merger or acquisition as permitted by the rules of the applicable national securities exchange...

  • Page 158
    grant date. However, the exercise price for any option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code cannot be less than 100% of the fair market value of the Class A common stock on the date of grant. Options granted under the Equity Plan ...

  • Page 159
    .... Restricted Stock Awards. Restricted stock awards are granted pursuant to restricted stock agreements. The purchase price of a restricted stock award cannot be less than 50% of the fair market value of the Class A common stock on the date of grant or at the time the purchase is made. Shares awarded...

  • Page 160
    ... of shares, exchange of shares, change in corporate structure or otherwise), the class(es) and maximum number of shares subject to the Equity Plan, the maximum annual award limit applicable under the Equity Plan and the class(es) and number of shares and price per share of stock subject to...

  • Page 161
    ... of the stock's fair market value over the purchase price, if any. However, to the extent the stock is subject to certain types of vesting restrictions, the taxable event will be delayed until the restrictions lapse, unless the recipient elects to be taxed on receipt of the stock by filing a Section...

  • Page 162
    ... plan contains a per-employee limitation on the number of shares for which such awards may be granted during a specified period, the per-employee limitation is approved by the stockholders, and the exercise or strike price of the award is no less than the fair market value of the stock on the date...

  • Page 163
    NEW PLAN BENEFITS 2002 Director Plan The following table presents certain information with respect to awards that will be granted under the Director Plan to our current non-executive directors in 2006. Name and Position Number of Shares of Class A Common Stock Steven B. Fink, Chairman of the Board ...

  • Page 164
    ... following table represents aggregate fees billed or to be billed to LeapFrog for services performed for the fiscal years ended December 31, 2005 and 2004, by Ernst & Young LLP, our independent registered public accounting firm. Fiscal Year Ended (in thousands) 2005 2004 Audit Fees ...Audit-related...

  • Page 165
    ... LLP in 2005 and 2004. Pre-Approval Procedures of Audit and Non-Audit Services by the Independent Registered Public Accounting Firm As set forth in its charter, the Audit Committee must pre-approve all audit and non-audit services performed by the independent registered public accounting firm. As...

  • Page 166
    ... a single proxy statement addressed to those stockholders. This process, which is commonly referred to as "householding," potentially means extra convenience for stockholders and cost savings for companies. This year, a number of brokers with account holders who are LeapFrog stockholders will be...

  • Page 167
    ... is a controlling stockholder of LeapFrog. The director is an employee, officer or director of a foundation, university or other non-profit organization to which LeapFrog gives directly, or indirectly through the provision of property or services, in the current fiscal year, donations that do not...

  • Page 168
    ...its Non-Employee Directors, to secure and retain the services of new Non-Employee Directors and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Controlled Corporations. 2. DEFINITIONS. (a) "Accountant" means the independent public accountants of...

  • Page 169
    ... LeapFrog Enterprises, Inc., a Delaware corporation. (j) "Consultant" means any person, including an advisor, (i) engaged by the Company or a Controlled Corporation to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors...

  • Page 170
    ... Section 422 of the Code. (u) "Initial Grant" means a Stock Award granted to a Non-Employee Director who meets the specified criteria pursuant to Section 6(a) of the Plan. (v) "IPO Date" means the date the Company's Class A Common Stock is first offered to the public under a registration statement...

  • Page 171
    ... (dd) "Performance Stock Award" means a Stock Award granted under the terms and conditions of Section 8(d). (ee) "Plan" means this LeapFrog Enterprises, Inc. 2002 Non-Employee Directors' Stock Award Plan. (ff) "Restricted Stock Award" means an award of shares of Class A Common Stock which is granted...

  • Page 172
    ...the type of Stock Awards and the number of shares subject to such Stock Awards with respect to Initial and Annual Grants, as set forth in Section 6(c). (b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine...

  • Page 173
    ...as applicable, be granted an Initial Grant as described in Section 6(c) below. (b) Annual Grants. Without any further action of the Board, on each July 1 ("Annual Grant Date"), commencing on July 1, 2004, each person who is then a Non-Employee Director, automatically shall be granted an Annual Grant...

  • Page 174
    ... the position of Chairman of the Board on the Annual Grant Date, such Non-Employee Director shall instead be granted an Annual Grant to purchase Twenty-Five Thousand (25,000) shares of Class A Common Stock on the terms and conditions set forth herein. (ii) Other Types of Stock Awards. If the Initial...

  • Page 175
    ... to the Board. Unless otherwise specifically provided in the Option, the purchase price of Class A Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Class A Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the...

  • Page 176
    ... legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law. (ii) Vesting. Shares of Class A Common Stock awarded under a Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be...

  • Page 177
    ... subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award. (v) Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Class A Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in...

  • Page 178
    ... number of shares of Class A Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) the strike price that will be determined by the Board at the time...

  • Page 179
    ... Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (c) Investment...

  • Page 180
    ... as a sale, any shares of Class A Common Stock or other securities of the Company held by the Participant, for a period of time specified by the managing underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of a registration statement of the Company filed under...

  • Page 181
    ...Awards (i.e., earliest granted Stock Award cancelled last) unless the Participant elects in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing...

  • Page 182
    ... twelve (12) months before or after the date the Plan is adopted by the Board. 16. CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Plan shall be governed by the law of the State of Delaware, without regard to such state's conflict of laws rules. B-15

  • Page 183
    ...the following events after the date the Company's Class A Common Stock is first offered to the public under a registration statement declared effective under the Securities Act: (i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than...

  • Page 184
    ..." means LeapFrog Enterprises, Inc., a Delaware corporation. (i) "Consultant" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) serving as a member of the Board of Directors of...

  • Page 185
    ...the Company. (s) "Fair Market Value" means, as of any date, the value of the Class A Common Stock determined as follows: (i) If the Class A Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share...

  • Page 186
    ...a "non-employee director" for purposes of Rule 16b-3. (v) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (w) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations...

  • Page 187
    ... corporate item, transaction, event or development; (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting...

  • Page 188
    ... of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii...

  • Page 189
    ...the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) Share Reserve. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the number of shares of Class A Common...

  • Page 190
    ... years from the date of grant. (c) Section 162(m) Limitation on Annual Grants. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, no Employee shall be eligible to be granted Stock Awards covering more than Two Million (2,000,000) shares of Class A Common Stock during...

  • Page 191
    ... 424(a) of the Code. (d) Consideration. The purchase price of Class A Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations and as determined by the Board in its sole discretion, by any combination of the methods of payment set...

  • Page 192
    ... otherwise specifically provided in the Option, the purchase price of Class A Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Class A Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Class A Common Stock...

  • Page 193
    ... shares of Class A Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time...

  • Page 194
    ... of Class A Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) Termination of Participant's Continuous Service. In the event...

  • Page 195
    ... number of shares of Class A Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) the strike price that will be determined by the Board at the time...

  • Page 196
    ... OF PROCEEDS FROM STOCK. Proceeds from the sale of Class A Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) Acceleration of Exercisability and Vesting. The Board shall have the power to accelerate the time at which a Stock Award may first...

  • Page 197
    ...and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Class A Common Stock with...

  • Page 198
    ... subject to award to any person pursuant to Section 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Class A Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and...

  • Page 199
    ... 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees. (c) Contemplated Amendments. It is expressly contemplated that the Board may amend the Plan in any respect...

  • Page 200
    ...Annual Meeting of Stockholders will take place at 9:00 a.m. Pacific time on Friday, June 16, 2006 at the company's headquarters in Emeryville, California. Mark B. Flowers EVP, Chief Technology Officer Stanley E. Maron Senior Partner Maron & Sandler Madeline T. Schroeder EVP, Product Development...

  • Page 201
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