LeapFrog 2008 Annual Report Download

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LeapFrog Annual Report 2008
See your child’s play and learning online
exclusively with the Learning Path!
...and leads
to another…
It starts with
a product...
It s
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ta
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wi
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i
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Table of contents

  • Page 1
    LeapFrog Annual Report 2008 ...and leads to another...It starts st tarts wi with ith h a product... See your child's play and learning online exclusively with the Learning Path!

  • Page 2
    ... Award Oppenheim Toy Portfolio U.S.A. Top Ten Toy of the Year Award FamilyFun Magazine U.S.A. Silver Honors Award Parents' Choice Foundation U.S.A. Gold Award Practical Pre-School Magazine United Kingdom Children's Choice Award Canadian Toy Testing Council Canada Toy of the Year Award Australian...

  • Page 3
    ...year of jarring economic collapse (the last three months). As planned, LeapFrog successfully brought to market a portfolio of new and innovative products in 2008 including three compelling connected products: our acclaimed Tag reading system, a web-connected version of the original Leapster handheld...

  • Page 4
    ... age range of four to six year olds. Building Exceptional Learning Content LeapFrog content (our books and games) is our best opportunity to drive margins upwards and smooth the seasonality of product sales. With that in mind, we have developed relationships with software developers and the best...

  • Page 5
    ... journey" and helps customers transition to new products along the way. Web sales on LeapFrog.com, a major focus area for 2008, grew 20 percent year-over-year driven in part by more than two million Tag audio downloads through the Learning Path. Research results to-date show that Learning Path users...

  • Page 6
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  • Page 7
    ... (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 8

  • Page 9
    ...revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. SPECIAL NOTE ON FISCAL PERIOD DATES This report on Form 10-K presents information regarding LeapFrog's performance during the fiscal years ended December...

  • Page 10
    ...and Procedures ...Other Information ...Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Party Transactions, and Director Independence...

  • Page 11
    ..., we also plan to invest where prudent; our 2009 strategies will be focused on driving sales of our learn-to-read and educational gaming market platforms, introducing additional connected products, expanding our content library, establishing parents' familiarity with the LeapFrog Learning Path...

  • Page 12
    ...International. Historically, we operated a School segment that sold products tailored for the United States educational market directly to schools, teacher supply stores and through catalogs and websites aimed at educators. After several years of extensive investments in direct sales and in research...

  • Page 13
    ... to twelve years old, the Crammer is an electronic study device featuring custom flash cards, on-board games and free downloadable educational content, all playable while listening to music. • • • • Learning Toys: • Learning Toys are stand-alone products that help develop fine motor...

  • Page 14
    ... create customer entry points to our Reading Solutions and Educational Gaming product families. Our product strategy centers on products that are designed to "age up" with our child end users. • • • LeapFrog Learning Path: In 2008, we introduced a web-based service, the LeapFrog Learning...

  • Page 15
    ... of our products. In order to work closely with our manufacturing service providers, we have established subsidiaries in Hong Kong and Shenzhen, China. We manage our outsourced manufacturing by allowing LeapFrog's engineering resources to focus on the product design and manufacturability while our...

  • Page 16
    .... LeapFrog is committed to designing and manufacturing products that meet applicable safety and regulatory requirements. Research and Development LeapFrog designs the hardware platforms and related software-based content using in-house research and development resources and outside consultants as...

  • Page 17
    ... of our game production to third-party contract manufacturers to drive efficiencies and to keep our costs competitive. Advertising and Marketing Our advertising and marketing strategy is designed to position LeapFrog as a leader in providing engaging, effective, technology-based learning solutions...

  • Page 18
    ... parties for manufacturing, marketing, distribution and sale of various products. Our licensing strategy concentrates on extending our current brand through thirdparty products that are consistent with our core commitment to the design and development of educational products that make learning fun...

  • Page 19
    ... the effects of seasonality on our business see Part I, Item 1A.-Risk Factors-"Our business is seasonal, and our annual operating results depend, in large part, on sales relating to the brief holiday season" Financial Information about United States and International Operations Financial information...

  • Page 20
    ... obtain information regarding the operation of the Public Reference Room of the SEC by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically...

  • Page 21
    ...-Q, current reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, available (free of charge), or through the investor relations section of our website located at www.LeapFrog.com under "About LeapFrog-Investor Relations-SEC...

  • Page 22
    ... our customers to remove from the stream of commerce certain of our products that did not meet the new federal standards for lead and other substances by February 10, 2009. We have notified retailers to return affected products in the retailers' inventories. We estimated the total financial exposure...

  • Page 23
    ... of our consolidated gross sales and 69% of the United States segment's gross sales in 2008, and our dependence upon a small group of retailers may increase. Gross sales ("sales") comprise the total customer billings for the year. Our top three retailers in 2008 were Wal-Mart, Toys "R" Us and Target...

  • Page 24
    ... our current and planned key products, such as the Tag reading system, the Leapster2 and its successors, and some of our upcoming learning toys, are built as web-enabled products designed to be connected to a computer that has Internet access in order to access content and features. As our strategy...

  • Page 25
    ...to use these systems to purchase products or to access features or content for our increasing number of web-connected products, then customers could be inconvenienced or become dissatisfied with our products. For example, in the past, our website has suffered service disruptions and delays from time...

  • Page 26
    .... Recently, there have been product quality issues for other producers of toys and other companies that manufacture goods in China. In addition, there have been concerns about foreign exchange rates and rising labor and energy costs related to doing business in China. We outsource substantially...

  • Page 27
    ... companies from using 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...

  • Page 28
    ... have a material adverse effect on our business. Armed hostilities, terrorism, natural disasters, or public health issues, whether in the United States or abroad could cause damage and disruption to our company, our suppliers, our manufacturers, or our customers or could create political or economic...

  • Page 29
    ...affecting our business. Our future success depends partly on the continued contribution of our key executives and technical, sales, marketing, manufacturing and administrative personnel. Part of our compensation package includes stock and/or stock options. To the extent our stock performs poorly, it...

  • Page 30
    ..., sales and operations in Texas, Canada, England, France, Mexico and China, each of which is less than 15,000 square feet of space. Location Use Segment Condition Type of Lease Square Feet Possession Expiration Date Fontana, California Emeryville, California Ontario, California Distribution center...

  • Page 31
    ...the New York Stock Exchange, or the NYSE, under the symbol "LF." On March 2, 2009, there were 2,717 holders of record of our Class A common stock and nine holders of record of our Class B common stock. The following table sets forth the high and low sales prices per share of our Class A common stock...

  • Page 32
    ... Index for the period beginning on December 31, 2003 (based on the closing price of LeapFrog's Class A common stock as reported on the New York Stock Exchange) through December 31, 2008. The stockholder return shown on the graph below is not necessarily indicative of future performance and we do not...

  • Page 33
    ... should be read in conjunction with Part II, Item 7-"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto. 2008 2007 2006 2005 (In millions, except per share data) 2004 Consolidated Statements of...

  • Page 34
    ..., the United Kingdom and France, and the Leapster2 handheld gaming system, which was launched in the United States, Canada, and the United Kingdom, are designed to be connected to the Learning Path. We expect to introduce Learning Path in other LeapFrog international markets in 2009. Our business is...

  • Page 35
    .... In 2009 and succeeding years we plan to introduce new products in our reading solutions, educational gaming, and learning toy product lines. Additional focus will be placed on expanding our content library, establishing parents' familiarity with the Learning Path, and expanding our online play...

  • Page 36
    ... by declining sales of our older products, some of which were being retired. Foreign currency exchange rates accounted for approximately $4.9 million or a 1% decrease in net sales during the year. Net sales related to new platform products and related content introduced in 2008 totaled approximately...

  • Page 37
    ... stores and distributors and school-related distributors and resellers through a combination of sales representatives. We also sell our products through our online store and other Internet-based channels. % Change 2008 vs. 2006 2007 (Dollars in millions) % Change 2007 vs. 2006 2008 2007 Net sales...

  • Page 38
    ... Year 2008 Compared to Fiscal Year 2007 Net sales increased 7% primarily due to the strong performance of platform and related content products associated with the key 2008 product launches of Tag, Leapster2 and Didj and solid net growth in LeapFrog.com, offset by declining sales of older products...

  • Page 39
    ...International segment includes the net sales and related expenses directly associated with selling our products to national and regional mass-market and specialty retailers and other outlets through the LeapFrog offices in the United Kingdom, France, Canada and Mexico as well as through distributors...

  • Page 40
    ... 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...

  • Page 41
    ... support extensive new product introductions planned for 2008 and 2009. We expect research and development expenses to decline again in 2009, given lower headcount and a shift to more content development as compared to platform development. Advertising Expenses Advertising expense consists of costs...

  • Page 42
    ...(0.9) Total ...Fiscal Year 2008 Compared to Fiscal Year 2007 $(6.3) $ 3.6 $ 6.2 -64% -200% -164% -138% -275% -3% 0% n/a 11% -42% Interest income declined, due both to lower average excess cash balances available for investment and a change in investment vehicles from a combination of money-market...

  • Page 43
    ...plan to invest where prudent; our 2009 strategies will be focused on driving sales of our learn-to-read and educational gaming market platforms, introducing additional connected products, expanding our content library, establishing parents' familiarity with the Learning Path and expanding our online...

  • Page 44
    ... increased by $2.1 million as proceeds from stock option exercises and employee stock purchase plans declined significantly due to the deteriorating stock price in 2008 which depressed stock purchases. Fiscal Year 2007 Compared to Fiscal Year 2006 Net cash used in operations in 2007 increased $105...

  • Page 45
    ...year. In 2008, this net sales-related cash flow decline was partially offset during the fourth quarter as we tightened our cash management practices in response to the economic crisis, resulting in an increase in accounts payable of approximately $10 million at the end of 2008 as compared to the end...

  • Page 46
    ... been performed. 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 subscriptions...

  • Page 47
    ... for product returns, defective products, charge-backs, discounts, promotions and cooperative advertising arrangements with customers in the same period that we record the related revenue. We estimate our allowances by utilizing our historical information for existing products. For new products, we...

  • Page 48
    ... loss is recorded in the statement of operations in the same period. Our evaluations of capitalized content and website costs require us to make complex and subjective judgments, using currently available data as well as projections about the potential impact of possible future events and conditions...

  • Page 49
    ...future assessments may differ from the amounts accrued and may result in an increase or reduction to the effective tax rate in the year of resolution. Such adjustments could have a material impact on our financial position, results of operations or cash flows. We account for stock-based compensation...

  • Page 50
    ... 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 United States dollars ("USD"). Sales to our international customers are transacted...

  • Page 51
    ...design and operation of our disclosure controls and procedures, or disclosure controls, as of the end of the period covered by this annual report on Form 10-K. This controls evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer...

  • Page 52
    ... our management and directors. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. • Management assessed our internal control over financial reporting as...

  • Page 53
    ...and Ethics. We 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.leapfrog.com. at "About LeapFrog-Investor Relations-Corporate Governance." On July 7, 2008 we filed with the NYSE the...

  • Page 54
    Equity Compensation Plan Information The following table shows certain information concerning our Class A common stock to be issued in connection with our 2002 Equity Incentive Plan and our 2002 Non-Employee Directors' Stock Award Plan as of December 31, 2008: Number of securities to be issued upon ...

  • Page 55
    ... Financial Statement Schedules: The following financial statement schedule is included as Appendix A of this Form 10-K: 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 Annual Report...

  • Page 56
    ... Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEAPFROG ENTERPRISES, INC. By: /s/ William B. Chiasson William B. Chiasson Chief Financial Officer and Principal Financial Officer Date: March 6, 2009 POWER...

  • Page 57
    Signatures Title Date /s/ E. STANTON MCKEE, JR. E. Stanton McKee, Jr. Director March 6, 2009 /s/ DAVID C. NAGEL David C. Nagel Director March 6, 2009 /s/ CADEN WANG Caden Wang Director March 6, 2009 /s/ RALPH R. SMITH Ralph R. Smith Director March 6, 2009 47

  • Page 58
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  • Page 59
    LEAPFROG ENTERPRISES, INC. FORM 10-K Index to Consolidated Financial Statements For the Fiscal Year Ended December 31, 2008 Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of ...

  • Page 60
    ... of FASB Statement No. 109," effective January 1, 2007. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LeapFrog Enterprises, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria...

  • Page 61
    ..., LeapFrog Enterprises, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the...

  • Page 62
    ... $97 at December 31, 2008 and 2007, respectively ...Inventories ...Prepaid expenses and other current assets ...Deferred income taxes ...Total current assets ...Long-term investments ...Deferred income taxes ...Property and equipment, net ...Capitalized product costs, net ...Goodwill ...Other assets...

  • Page 63
    LEAPFROG ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Years Ending December 31, 2008 2007 2006 Net sales ...Cost of sales ...Gross profit ...Operating expenses: Selling, general and administrative ...Research and development ...Advertising ......

  • Page 64
    ... of year: Class A shares ...Class B shares ...Treasury stock ...Paid-in capital ...Total, beginning of year ...Class A common shares issued upon exercise of employee stockbased awards and purchases made under the employee purchase plan ...Net cash paid for payroll taxes on restricted stock unit...

  • Page 65
    ... of product costs ...Purchases of investments ...Sales of investments ...Net cash (used in) provided by investing activities ...Financing activities: Proceeds from stock option exercises and employee stock purchase plans ...Net cash paid for payroll taxes on restricted stock unit releases...

  • Page 66
    ... around the world. LeapFrog has developed a number of learning platforms that support a broad library of software titles covering important subjects including phonics, reading, writing, and math. In addition, LeapFrog has created a broad line of "stand-alone" educational products ("toys") that do...

  • Page 67
    ... in the prior years' financial statements have been reclassified to conform to the current year's presentation. Revenue Recognition The Company derives the majority of its revenue from sales of its technology-based learning products and related proprietary content. The Company recognizes revenue...

  • Page 68
    ... and subjective judgments, using currently available data as well as projections about the potential impact of possible future events and conditions, which judgments and projections are inherently uncertain. Inventory Valuation Inventories are stated at the lower of cost or market value, on a first...

  • Page 69
    ... and software included in its learning products and thirdparty consulting and design costs related to the Company's website. The Company's website has an application designed specifically for use with certain of its products. The Company capitalizes certain external costs related to the development...

  • Page 70
    ... a project reaches technological feasibility are capitalized. Capitalized costs are amortized into cost of sales when the product is released to the market, generally using a three-year life and the "sum of the years' digits" method. Capitalized research and development costs are reviewed for future...

  • Page 71
    ...'s direct costs of advertising, in-store displays and promotion programs are expensed as incurred. Under the Company's arrangements with certain of its customers, it reduces the net selling price of its products as an incentive (sales allowances) for the customers to independently promote LeapFrog...

  • Page 72
    ...Employee Directors' Stock Award Plan (collectively, the "Plans"), the Company issues stock options, restricted stock awards and restricted stock units to its employees, directors and occasionally to non-employee service providers, to purchase shares of the Company's Class A common stock. The Company...

  • Page 73
    ... to enable investors to better understand the effects of the derivative instruments on an entity's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does...

  • Page 74
    ... STATEMENTS (In thousands, except per share data) 3. Fair Value of Financial Instruments The carrying values and estimated fair values of the Company's financial instruments, which include shortterm money market funds, foreign exchange forward contracts and long-term investments in auction rate...

  • Page 75
    .... NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) assessment of independent valuations performed as of January 31, 2008 and 2007 to value its investment in ARS. In accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting...

  • Page 76
    ... and software included in its learning products and thirdparty consulting and design costs related to the Company's website. The Company's website has an application designed specifically for use with certain of its products. December 31, 2008 2007 Content costs ...Website development costs ...Less...

  • Page 77
    ...: December 31, 2008 2007 Advertising and promotion ...Royalties payable ...Employee-related expenses ...Accrued inventory, manufacturing and warehousing ...Deferred revenue ...One-time termination benefits ...Marketing, consulting and web-related ...Facilities-related closure costs ...Legal fees...

  • Page 78
    ... typically calculated as a percentage of the unit product selling price. Royalty expense is recorded when the products are shipped to a customer, and is reported under cost of sales in the statements of operations. The total amount of royalty expense related to these license agreements was $19,315...

  • Page 79
    ... since the fourth quarter of 2007 due to the adverse credit and financial markets conditions which have prevailed since then. The carrying value of the Company's investment in auction rate securities has declined 65% from its original book value, or par, as of December 31, 2008. The adverse economic...

  • Page 80
    ... NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) LeapFrog 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' financial condition; generally...

  • Page 81
    ... FINANCIAL STATEMENTS (In thousands, except per share data) 12. Income Taxes The Company accounts for income taxes in accordance with the requirements of SFAS 109 and FIN 48. The Company's loss before taxes included the following components: Years Ending December 31, 2008 2007 2006 United States...

  • Page 82
    ... The Company's domestic net operating losses for the most recent three-year period, the additional net operating losses in 2008 and changes in its business strategy increased the uncertainty that the level of future profitability needed to record the deferred assets would be achieved and represented...

  • Page 83
    ..., INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) valuation allowance under the provisions of SFAS 109. The valuation allowance in both 2008 and 2007 includes $8,503 related to excess tax benefits of stock option deductions prior to the adoption of...

  • Page 84
    ... statement for its 2008 Annual Meeting of Stockholders, filed with the SEC on April 21, 2008. Under the option exchange program ("Program") the Company offered to exchange, for new lowerpriced options, certain outstanding options previously granted under the Company's Plans and under two special...

  • Page 85
    ...936 shares of the Company's Class A common stock, and issued stock options to purchase 3,669 shares of the Company's Class A common stock in exchange. In accordance with the terms of the Program, the number of shares subject to each new option grant was determined using an exchange ratio designed to...

  • Page 86
    ... FINANCIAL STATEMENTS (In thousands, except per share data) RSUs and RSAs: RSAs and RSUs are payable in shares of the Company's Class A common stock. The fair value of these stock-based awards is equal to the closing market price of our stock on the trading day immediately prior to the date of grant...

  • Page 87
    ... data about employee exercise behavior to calculate the expected term due to reductions in force. The risk-free interest rate used in the model is based on the United States Treasury yield curve in effect at the time of grant with a term equal to the expected life of the option. The Company...

  • Page 88
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) Stock options outstanding that are expected to vest are shown net of estimated future option forfeitures. The price of a share of the Company's Class A common stock was $3.50 and $6.37 as ...

  • Page 89
    ... the date of this report, no dividends have been declared or paid and management has no plans at this time to pay dividends in the foreseeable future. In the event of liquidation, Class A and B common stockholders are equally entitled to all assets of the Company available for distribution. F-31

  • Page 90
    ... restricted stock units and certain stock options to purchase shares of LeapFrog Class A common stock are excluded from the calculations of net loss per share for the three years ended December 31, 2008, 2007 and 2006 as their effect on net loss per share would be antidilutive. Outstanding weighted...

  • Page 91
    ..., LeapFrog organized, operated and assessed its business in three segments, U.S. Consumer, International and School. The School segment sold products tailored for the educational market directly to schools, teacher supply stores and through catalogs and websites aimed at educators, all in the United...

  • Page 92
    ...: • The United States segment is responsible for the development, design and marketing of electronic educational hardware products and related software, sold primarily through retail channels and through the Company's website in the United States. The International segment is responsible for the...

  • Page 93
    ... CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) Kingdom based on the sales billed by its United Kingdom-based foreign subsidiary, LeapFrog Toys (UK) Limited, to its customers. Additionally, the Company attributes sales to non-United States countries if the product is shipped...

  • Page 94
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) 21. Selected Quarterly Financial Information-Unaudited Unaudited selected financial information by quarter for the years ended December 31, 2008 and 2007 is presented below. March 31 For ...

  • Page 95
    ...Allowance for defective products, end of year ...Allowance for sales returns, beginning of year ...Additions charged to operations ...Net other additions (deductions) ...Allowance for sales returns, end of year ...Allowance for chargebacks and price changes, beginning of year ...Additions charged to...

  • Page 96
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  • Page 97
    ...LeapFrog Credit Agreement between the financial institutions named therein, Banc of America Securities LLC, Bank of America, N.A. and LeapFrog Enterprises, Inc. as the Borrower dated as of November 8, 2005 Amended and Restated Stock Option Plan Amended and Restated Employee Equity Participation Plan...

  • Page 98
    ... Performance Share Award Agreement under the 2002 Equity Incentive Plan 2002 Non-Employee Directors' Stock Award Plan, as amended Form of Nonstatutory Stock Option Agreement under the 2002 Non-Employee Directors' Stock Award Plan Compensation Arrangements between LeapFrog and its Board of Directors...

  • Page 99
    ... contained under the heading "Compensation of Directors" in LeapFrog's definitive proxy materials filed with the Securities and Exchange Commission on April 21, 2008 and incorporated herein by reference. Descriptions contained in LeapFrog's Current Reports on Form 8-K filed with the Securities and...

  • Page 100
    ... and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Jeffrey G. Katz Jeffrey G. Katz Chief Executive Officer b) Date: March 6, 2009

  • Page 101
    ... internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated...

  • Page 102
    ... of the Company at the end of the period covered by the Annual Report and results of operations of the Company for the periods covered in the financial statements in the Annual Report. 2. Dated: March 6, 2009 /s/ Jeffrey G. Katz Jeffrey G. Katz Chief Executive Officer /s/ William B. Chiasson...

  • Page 103
    ...the annual meeting is April 6, 2009. Only stockholders of record at the close of business on that date may vote at the meeting or any postponement or adjournment thereof. This year, we will be using the Securities and Exchange Commission's new "Notice and Access" delivery model allowing companies to...

  • Page 104

  • Page 105
    ..., June 4, 2009 at 9:00 a.m. local time at our headquarters located at 6401 Hollis Street in Emeryville, California. Directions to the annual meeting may be found at www.leapfrog.com under About Us-Contact Us. Who can vote at the annual meeting? Only stockholders of record at the close of business on...

  • Page 106
    ...for our fiscal year ending December 31, 2009. In addition, Mollusk Holdings, LLC, or Mollusk Holdings, an entity controlled by Lawrence J. Ellison that holds a majority of our voting power, has notified us, as required under our bylaws, that it intends to propose, at the annual meeting, stockholder...

  • Page 107
    ..., 2009 to our Corporate Secretary at 6401 Hollis Street, Emeryville, California 94608. If you wish to submit a proposal that is not to be included in next year's proxy materials or nominate a director, you must do so between February 4, 2010 and March 6, 2010. You are also advised to review LeapFrog...

  • Page 108
    ...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, 2009. This proposal must receive a "For" vote from the holders of a majority of the voting power present and entitled to vote...

  • Page 109
    ... of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under "Risk Factors" in Item 1A of our 2008 annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 11, 2009. In...

  • Page 110
    ...were appointed by our board of directors to fill vacancies created by the resignations of Steven B. Fink and Ralph R. Smith. LeapFrog's policy is to encourage nominees for directors to attend the annual meeting of stockholders. Two directors attended our 2008 annual meeting. Directors are elected by...

  • Page 111
    ... Investments and the owner of shares representing a majority of our outstanding voting power. From September 1999 to May 2004, he held the position of Corporate Development Group Director at Cadence Design Systems, an electronic design automation software and services company, where he managed...

  • Page 112
    ... on the board of directors of Fossil, Inc., a publicly held company that designs, develops, markets and distributes fashion related consumer products, and was a member of its audit committee, nominating and corporate governance committee and a special committee advising on option backdating. Mr...

  • Page 113
    ... the fiscal year ending December 31, 2009, and has further directed that management submit the selection of an independent registered public accounting firm for ratification by the stockholders at the annual meeting. Ernst & Young LLP has audited our consolidated financial statements since September...

  • Page 114
    ... audit-related services totaled $11,000 in 2008, which consisted of fees related to an SEC letter review and a Form S-8 registration filing with the SEC, and $38,000 in 2007, which consisted of fees related to an analysis of FASB Interpretation Number 48 and a Form S-8 registration statement filing...

  • Page 115
    ...majority of the outstanding voting power. 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 LeapFrog's common stock as of March 20, 2009 by: (i) each director; (ii) each...

  • Page 116
    ... stock and 27,140,794 shares of Class B common stock outstanding as of March 20, 2009. 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, Emeryville, California...

  • Page 117
    ... Mateo, California 94403. (9) Based solely on information provided in a Schedule 13G filed on March 9, 2009 by Wells Fargo & Company, Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC. Wells Fargo & Company is reported as having sole voting power over 2,811,900 shares, sole...

  • Page 118
    ...stock unit awards that are scheduled to vest within 60 days after March 20, 2009, provided that pursuant to the terms of the grant, the shares will not be released by LeapFrog until three months following the expiration or termination of Mr. Maron's term on LeapFrog's board of directors. The address...

  • Page 119
    ...20, 2009, provided that pursuant to the terms of the grant, the shares will not be released by LeapFrog until three months following the expiration or termination of Mr. Wang's term on LeapFrog's board of directors. (24) Based on all existing executive officers and all incumbent directors as a group...

  • Page 120
    ... services provided to LeapFrog as an employee, director, consultant or similar capacity by a related person are not covered by this policy. A related person is any executive officer, director, or more than 5% stockholder of LeapFrog (as determined by the combined voting power of all classes of stock...

  • Page 121
    ... accordance with SEC rules based on information furnished by each stockholder, shares representing 14.1% of our voting power are considered beneficially owned by both Michael R. Milken and Lowell J. Milken.) In addition, Mr. Simon serves as a director of Mounte LLC. In March 2006, the parties agreed...

  • Page 122
    ... CORPORATE GOVERNANCE BOARD OF DIRECTORS Independence of the Board of Directors We are a "controlled company" within the meaning of the New York Stock Exchange, or NYSE, listing standards because Mollusk Holdings holds more than 50% of the voting power of our outstanding shares. This status provides...

  • Page 123
    ... our Annual Report on Form 10-K for the year ended December 31, 2008. However, as required, amounts shown in the table exclude the impact of estimated forfeitures related to service-based vesting conditions (3) At December 31, 2008, our non-employee directors each held an aggregate number of shares...

  • Page 124
    ...-employee directors in the option exchange program was $9.14 per share. The assumptions made in the valuation of the replacement option awards are discussed in Note 14, "Stock-Based Compensation," of Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December...

  • Page 125
    ...000 shares of our Class A common stock and the annual grant is an option to purchase 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 the annual grant will receive an annual grant of...

  • Page 126
    ... other than the standard annual option grants described above. Committees of the Board In 2008, our board had three committees: an audit committee, a compensation committee, and a nominating and corporate governance committee. The following table provides membership and meeting information for each...

  • Page 127
    ... is defined in Section 303A.02 of the NYSE listing standards). The audit committee has adopted a written audit committee charter that is posted on our website at www.leapfrog.com under About Us-Investor Relations-SEC Filings. Our board of directors has determined that Mr. McKee, the Chairman of our...

  • Page 128
    ... 2008, the audit committee reviewed the quarterly and annual financial statements and discussed the financial statements with management and Ernst & Young LLP, the company's independent registered public accounting firm. At each of its meetings to discuss financial statements, management represented...

  • Page 129
    ..., the audit committee recommended to the board of directors that the financial statements be included in LeapFrog's 2008 Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2008. Oversight of Independent Registered Public Accounting Firm The audit committee appoints...

  • Page 130
    ...only 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 persons based on level and the total number of shares that may be granted in any given year. Our policy is that we will not time or...

  • Page 131
    ... standards for "controlled companies," for Mr. Marinelli, Vice President of Lawrence Investments. The governance committee met four times during our 2008 fiscal year. Our governance committee charter is posted on our website at www.leapfrog.com under About Us-Investor Relations-Corporate Governance...

  • Page 132
    ... meetings and involvement of senior 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...

  • Page 133
    ...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.leapfrog.com under About Us-Investor Relations...

  • Page 134
    ...to all of our named executive officers. Executive Compensation Program Philosophy Our compensation philosophy is to provide total compensation packages that reasonably, equitably and responsibly meet the following objectives Motivate and reward outstanding company performance and to a lesser extent...

  • Page 135
    ... uses the services of an outside compensation consultant to provide it with advice and guidance on design of our compensation programs and policies and relevant information regarding executive compensation at similarly situated companies, as well as relevant information about other market practices...

  • Page 136
    ... 2.5x LeapFrog's size in: • Revenues, • Market capitalization, or • Number of employees Toys, educational products, consumer packaged goods for children, games (handheld, electronic, hardware or software), software or e-commerce The compensation committee reviewed and approved the following...

  • Page 137
    ...experience of the individual. Each year, the total compensation of executives is evaluated with respect to company performance, individual performance, changes in scope of responsibility and competitive market changes for each position. There is no pre-established policy or target for the allocation...

  • Page 138
    ... LeapFrog's short-term goals and are designed to reward company performance and individual performance. The compensation committee approved executive goals for 2008 performance-based bonuses at its February 2008 meeting and determined executive bonus awards for 2008 performance at its February 2009...

  • Page 139
    ... be modified from year to year based on competitive market data or on changes to an employee's position within the company. The funding of the company performance portion of the bonus pool for 2008 performance was based on four company financial measures: (1) total 2008 net sales, (2) overall gross...

  • Page 140
    ... The goal of the new company performance component of the 2009 bonus plan (which again represents 80% of any bonus funding for our executives as described in more detail below) represents a significant change from the bonus plans of recent years in that it focuses on managing cash flow and achieving...

  • Page 141
    ...in July 2009 based on our operating plan for 2009 and data regarding our financial results and business expectations as of that time, with any actual bonuses resulting from this funding to be paid in early 2010. The element of the company performance component of the target bonus pool related to the...

  • Page 142
    ... stock award granting policy described below. Guidelines for the size of equity awards granted to each level of employee are reviewed annually and benchmarked against peer compensation group companies by our outside executive compensation consulting firm. This review and analysis serves to evaluate...

  • Page 143
    ... individual performance and total equity position, anticipated future contribution to our success, and alignment among similarly situated employees. In August 2008, the compensation committee approved the grant of stock options to our named executive officers as part of our annual equity grant...

  • Page 144
    ... compensation committee recommended to the full board, and the board subsequently approved, a stock option exchange program, under which our directors and employees would be offered the opportunity to exchange eligible out-of-the-money stock options for new options having an exercise price per share...

  • Page 145
    ... offered. The compensation committee reviews and approves any benefits we provide to our executive officers. Employee benefits include healthcare coverage and opportunity to participate in our 401(k) plan and our employee stock purchase plan. These benefits are generally available to all full-time...

  • Page 146
    ... performance share program. In addition, grants of stock options under our 2002 Equity Incentive Plan are also designed to qualify as "performance-based," provided the 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 total...

  • Page 147
    ... for more information regarding stock awards granted in 2008. The assumptions made in the valuation of the stock awards are discussed in Note 14, "Stock-Based Compensation," of Notes to Financial Statements included in our Annual Report on Form 10-K for the years ended December 31, 2008, 2007 or...

  • Page 148
    ... for more information regarding option awards granted in 2008. The assumptions made in the valuation of the option awards are discussed in Note 14, "Stock-Based Compensation," of Notes to Financial Statements included in our Annual Report on Form 10-K for the years ended December 31, 2008, 2007 or...

  • Page 149
    .... Pidel as part of his new hire compensation package to replace a bonus that he would have received from his former employer related to his performance in 2006, as well as certain unvested stock awards, that Mr. Pidel was forfeiting in order to join us. Under the terms of his offer letter, Mr. Pidel...

  • Page 150
    ...is approved by the board or compensation committee (or the next succeeding business day that the NYSE is open). The exercise price of all awards will equal the closing price of our common stock on the trading day immediately preceding the grant date. In the case of options granted in connection with...

  • Page 151
    ... June 9, 2009. Any remaining shares subject to the new award would vest in accordance with the original vesting schedule. Each of our named executive officers has previously been granted "tiered" options to purchase shares of our stock at then fair market value as well as at strike prices that were...

  • Page 152
    ... options for cancellation in exchange for new lower-priced options under LeapFrog's option exchange program. On June 9, 2008 new options were granted on a value-for-value basis with premium pricing and terms and conditions similar to the original grants. See accompanying footnotes to the Outstanding...

  • Page 153
    ... executive officers. Outstanding Equity Awards at December 31, 2008 Option Awards(1) Stock Awards Equity Equity Incentive Plan Incentive Awards: Market Plan Awards: Market or Number of Value of Number of Payout Value Shares or Shares Unearned of Unearned Units of or Units Shares, Units Shares, Units...

  • Page 154
    ...31, 2008. (4) Represents grant of option pursuant to our option exchange program in exchange for cancellation of an option to purchase 30,000 shares originally issued June 6, 2005 under the 2002 Non-Employee Director Stock Award Plan. Option vests 100% on June 9, 2009. (5) Represents grant of option...

  • Page 155
    ...15, 2008. (12) Represents grant of option pursuant to our option exchange program in exchange for cancellation of an option to purchase 150,000 shares originally issued November 11, 2004 under the 2002 Equity Incentive Plan. Option vests 100% on June 9, 2009. (13) Represents grant of option pursuant...

  • Page 156
    ... option vest on June 9, 2009 and the remaining shares subject to the option vest in 20 equal monthly installments commencing July 5, 2009. (22) Represents grant of option pursuant to the issuer's option exchange program in exchange for cancellation of an option to purchase 25,000 shares originally...

  • Page 157
    ...closing price as reported on the NYSE of our Class A common stock on the date the stock award vested, or $9.40 on September 17, 2008, by the number of shares acquired on vesting. (2) Calculated by multiplying the closing price as reported on the NYSE of our Class A common stock on the date the stock...

  • Page 158
    ... extent to which the market value of our common stock exceeds the exercise price on the date the option is exercised. Due to the number of factors that affect the nature and amounts of compensation and benefits provided upon the events discussed below, the amounts paid or distributed upon the actual...

  • Page 159
    ... the exercise price of the Options exceeded $3.50, the closing price of our Class A common stock as reported by the NYSE for December 31, 2008, there would have been no value related to the additional vesting. In addition, if during the two-year period following a change in control of LeapFrog, Mr...

  • Page 160
    ...to cure, show conduct demonstrating unfitness to serve, provided that the employee was given reasonable notice and opportunity to cure, or breach duties to the company including persistent unsatisfactory performance of job duties. • • Under the Severance Plan, "good reason" means any material...

  • Page 161
    ...in 2010. (2) Because the exercise price of the options exceeded $3.50, the closing price of our Class A common stock as reported by the NYSE for December 31, 2008, there would be no value related to the equity acceleration, assuming exercise on December 31, 2008. Participants are required to execute...

  • Page 162
    ... ($)(2) Name of Named Executive Officer Robert L. Moon ...Martin A. Pidel ... 277,600 250,000 5,064 15,852 - 45,000 (1) Amount paid over 12 months in semi-monthly installments ending December 1, 2009 and subject to the terms and conditions of the Severance Plan, including any applicable tax...

  • Page 163
    ... (2) direct your written request to our Director of Investor Relations, 6401 Hollis Street, Emeryville, California 94608 or to [email protected] or (3) contact our Investor Relations department at (510) 420-5150. Stockholders who currently receive multiple copies of the Notice of Internet Availability...

  • Page 164
    ... of at least 25% of the voting power of LeapFrog's outstanding capital stock to call a special meeting of the stockholders, subject to certain restrictions. The express right of stockholders to fill vacancies on our board of directors, including newly created directorships. The notice from Mollusk...

  • Page 165
    ...Index for the period beginning on December 31, 2003 through December 31, 2008 (based on the closing prices of LeapFrog's Class A common stock as reported on the New York Stock Exchange). The stockholder return shown on the graph below is not necessarily indicative of future performance and we do not...

  • Page 166
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  • Page 167
    ... CLASS A COMMON STOCK Continental Stock Transfer & Trust New York, New York (212) 509-4000 ANNUAL MEETING The 2009 Annual Meeting of Stockholders will take place at 9:00 a.m. Pacific time on Thursday, June 4, 2009, at the company's headquarters in Emeryville, California. INVESTOR RELATIONS LeapFrog...

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