LeapFrog 2009 Annual Report Download

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2009 Annual Report

Table of contents

  • Page 1
    2009 Annual Report

  • Page 2
    ... curriculum and technology with the power of the web to bring new levels of engagement, customization, and personalization to LeapFrog products. The Learning Path builds direct one-toone relationships with parents by empowering them with personalized feedback about their children's learning progress...

  • Page 3
    ...customers in our Learning Path system, up from one million a year ago. During 2009, we delivered 300 million personalized marketing impressions to our customers, which contributed to our strong point-of-sale performance and benefitted both retailers and LeapFrog. While direct sales through leapfrog...

  • Page 4
    ...called Leapster Explorer™. With its Linux-based operating system, it will be about five times more powerful than the current Leapster2. It will also have a touch screen, offer video, and serve both as a game system and a children's e-Book platform. With this more powerful mobile learning product...

  • Page 5
    ... our business. Please see the special note on forward-looking statements on page i of the enclosed LeapFrog Enterprises, Inc. 2009 Annual Report on Form 10-K. LEAPFROG, the LeapFrog logo, the LeapFrog Learning Path logo, LEAPWORLD, the LeapWorld logo, TAG, the Tag logo, the Tag Junior logo, LEAPSTER...

  • Page 6
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 7
    ...of June 30, 2009 calculated using the closing market price as of that day, was approximately $83.3 million. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding voting power of the registrant...

  • Page 8

  • Page 9
    ...future periods, future products and services we may offer, anticipated competitive benefits of our strategy or of current or future products or services, and the effects of strategic actions on future financial performance. These statements relate to future events or our future financial performance...

  • Page 10
    ... About Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security...

  • Page 11
    ... the world. Our product portfolio consists of standalone learning toys, interactive reading systems, educational gaming systems, and software-based book and game content. LeapFrog has developed a number of learning platforms, including the Leapster Learning Game System and Tag and Tag Junior Reading...

  • Page 12
    ...is responsible for the development, design, marketing and sales of our products, primarily through retail channels and through our website in the United States. We market and sell our products directly to national and regional mass-market and specialty retailers and other retail stores, distributors...

  • Page 13
    ...music player and study device. Targeted at children eight to twelve years old, 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: Our learning toys are products...

  • Page 14
    on younger children, create customer entry points to our Interactive Reading and Educational Gaming product families. Our learning toy strategy centers on products that are designed to "age up" with our child end users. • Launched in 2009, our Scout collection is a line of toys themed around our ...

  • Page 15
    ... international markets. The educational toy category continues to attract new entrants as well as new innovative products, and competition is significant. We believe the principal methods of competition in our industry are performance, features, quality, brand recognition, price and learning content...

  • Page 16
    ... to produce quality products in a timely and cost-effective manner and in sufficient quantities." We have established subsidiaries in Hong Kong and Shenzhen, China to work closely with the contract manufacturing service providers. These subsidiaries manage the supply of raw materials, labor and the...

  • Page 17
    ...game production are performed by third-party contractors to improve efficiency and control costs. Advertising and Marketing Our advertising and marketing strategy is designed to position LeapFrog as a leader in providing engaging, effective, technology-based learning solutions primarily for children...

  • Page 18
    ...use in their classrooms either through education market resellers or directly, through our website, www.LeapFrog.com. Retailers and distributors purchase our products either through free on board, or FOB, terms, in which case the products are picked up by our customer in China and the customer pays...

  • Page 19
    ... developed, we use various licensed technologies in some of our key products, such as Leapster and Tag. For example, we use a version of Macromedia's Flash player in our Leapster handheld platform and we use optical pattern recognition hardware and software from Anoto AB in our Tag reading systems...

  • Page 20
    ... 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, Inc., a provider of mobile personal...

  • Page 21
    ... integrate third-party technology with our own. In 2008, we introduced a number of new products and services to the market. These new products represented a substantial portion of our 2008 and 2009 sales. Furthermore, in 2009, we introduced a new toy line and new variations on our gaming and reading...

  • Page 22
    .... Many of our current and planned key products, such as the Tag reading system, Leapster2 and its successors, and some of recent 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 23
    ... or more members of our executive management team or other key employees could adversely affect our business. We have an experienced executive management team, as well as many talented and proven employees in key areas including but not limited to product development, engineering, and marketing. We...

  • Page 24
    ... 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. We rely, and plan...

  • Page 25
    ... key technology used in our Tag and Tag Jr. reading systems. Our continued use of these rights is dependent on our ability to continue to obtain these license rights at reasonable rates. Any failure to do so could interrupt our supply chain and require us to modify our products or business plans. In...

  • Page 26
    ...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 27
    ...For example, we may be required to manufacture at levels that lag rather than anticipate future order levels, which could limit our ability to sell and ship our products as demand increases, delaying our ability to benefit from improvements in the retail sales environment. Our international business...

  • Page 28
    ..., subject to risks associated with conducting business internationally, including developing successful products that appeal to the international markets; difficulties managing and maintaining relationships with vendors, customers, distributors and other commercial partners; political and economic...

  • Page 29
    ... us to deliver products to our customers, or for our manufacturers to deliver products to us, or suppliers to provide component parts. Notably, our U.S. distribution centers, including our distribution center in Fontana, California, and our corporate headquarters are located in California near major...

  • Page 30
    ... costs and divert management's attention and resources, adversely 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...

  • Page 31
    ...2009, TAG Toys, Inc. filed a complaint against the Company in the United States District Court for the Central District of California, alleging that our use of various logos and marks relating to the our Tag Reading Systems infringes trademark rights held by TAG Toys, constitutes a false designation...

  • Page 32
    PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information and Holders Our Class A common stock is listed on the New York Stock Exchange, or the NYSE, under the symbol "LF." On February 19, 2010, there were 2,724 holders of record of our Class A common ...

  • Page 33
    ... Accounting Policies" for additional information. * Weighted average shares outstanding of Class A and Class B common stock. 2009 2008 (1) 2007 (1) 2006 (1) (In millions) 2005 Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments ...Working capital ** ...Total...

  • Page 34
    ... Consolidated Financial Statements ("Notes") in Part II, Item 8 of this report. OVERVIEW We design, develop and market a family of innovative technology-based learning platforms and related proprietary content for infants to children twelve years old for use at home and in schools around the world...

  • Page 35
    ... kids who play with our products is the key to our future growth. Our strategic priorities for 2010 and beyond are to invest in the core categories of interactive reading, educational gaming, our learning toy line and in our Learning Path. Our marketing will be aimed at increasing consumer sales in...

  • Page 36
    ... Revisions for the Years Ended 2008 and 2007 Subsequent to the issuance of our September 30, 2009 unaudited consolidated financial statements, we determined there was an error in the way our stock plan management and reporting software was calculating stock-based compensation expense. We became...

  • Page 37
    ... offset by declining sales of our older products, some of which were being retired. Net sales for 2008 included a positive impact from changes in currency exchanges rates of one percentage point. Net sales related to new platform products and related content introduced in 2008 totaled approximately...

  • Page 38
    ... of salaries, employee benefits, stock-based compensation and other headcount-related expenses associated with content development, product development, product engineering, third-party development and programming and localization costs to translate content for international markets. We capitalize...

  • Page 39
    ...decline and fewer key product launches. More specifically, our marketing strategy leveraged less costly alternatives, such as direct-to-consumer marketing programs through the LeapFrog Learning Path, instead of traditional marketing programs. Fiscal Year 2008 Compared to Fiscal Year 2007 Advertising...

  • Page 40
    ... financial data has been recast to conform to the current presentation. Certain corporate-level costs, including expenses related to corporate operations associated with broad-based sales and marketing, product support services, supply chain, human resources, legal, finance, information technology...

  • Page 41
    ... and related content, and solid net growth in LeapFrog.com, offset by declining sales of older products such as the classic Leapster, LeapPad, Little Leaps, LeapTrack and other school market-related products. Net sales related to new platform products and related content introduced in 2008 totaled...

  • Page 42
    ...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 43
    ... AND CAPITAL RESOURCES Financial Condition Cash and cash equivalents totaled $61.6 million and $79.1 million at December 31, 2009 and 2008, respectively. In line with our investment policy, all cash equivalents were invested in money market funds that held only highgrade United States government...

  • Page 44
    ... working capital needs and planned capital expenditures over the next twelve months. Our 2010 strategies for capital expenditures will be focused on driving sales of our learn-to-read and educational gaming market platforms, introducing additional connected products, expanding our content library...

  • Page 45
    ...of investments declined by $67.6 million, offset by a $3.3 million decline in capital expenditures. Net cash used by financing activities 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...

  • Page 46
    This new credit facility supersedes and replaces our previous $100.0 million credit facility dated November 8, 2005 which would have otherwise expired in November 2010 and was terminated as of August 13, 2009 in connection with signing of the Loan Agreement. The Loan Agreement includes the following...

  • Page 47
    ...an understanding of the financial information in this report. Revenue Recognition, Allowance for Doubtful Accounts, and Other Revenue Reserves Revenue derived from sales of our technology-based learning products and related proprietary content is recognized when products are shipped and title passes...

  • Page 48
    ... of Content Development Costs We capitalize certain external costs related to the development of content for our learning products once technological feasibility has been established for the related projects. Our capitalized external costs generally relate to design, artwork, animation, layout...

  • Page 49
    ... costs related to developing applications that are an integral component of certain products we market, as well as some costs incurred to develop or acquire and customize code for web applications, costs to develop HTML web pages or develop templates. We evaluate the future recoverability of website...

  • Page 50
    ... Standards Codification (ASC) became the exclusive reference for nongovernmental accounting principles generally accepted in the United States for use in financial statements issued for interim and annual periods ended after September 15, 2009, except for SEC rules and interpretive releases...

  • Page 51
    ... 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 52
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LEAPFROG ENTERPRISES, INC. FORM 10-K Index to Consolidated Financial Statements For the Fiscal Year Ended December 31, 2009 Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of ...

  • Page 53
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 54
    ... Registered Public Accounting Firm The Board of Directors and Stockholders of LeapFrog Enterprises, Inc. We have audited LeapFrog Enterprises, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by...

  • Page 55
    ... Current liabilities: Accounts payable ...Accrued liabilities ...Income taxes payable ...Total current liabilities ...Long-term deferred income taxes ...Other long-term liabilities ...Stockholders' equity: Class A Common Stock, par value $0.0001 Authorized-139,500 shares; Issued and outstanding: 36...

  • Page 56
    LEAPFROG ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Years Ended December 31, 2009 2008 (1) 2007 (1) Net sales ...Cost of sales ...Gross profit ...Operating expenses: Selling, general and administrative ...Research and development ...Advertising ......

  • Page 57
    ... 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 releases ...Stock-based compensation...

  • Page 58
    ...Purchases of investments ...Sales of investments ...Net cash provided by (used in) 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 ...Borrowing on line of credit...

  • Page 59
    ...) designs, develops and markets a family of innovative technology-based learning platforms and related proprietary content for infants through children twelve years old at home and in schools around the world. LeapFrog has developed a number of learning platforms that support a broad library of...

  • Page 60
    ... Revisions to Prior Years Subsequent to the issuance of our September 30, 2009 unaudited consolidated financial statements, the Company determined there was an error in the way its stock plan management and reporting software was calculating stock-based compensation expense. The Company became aware...

  • Page 61
    ...filing. All future filings, including interim financial statements, will be revised appropriately. Revenue Recognition The Company derives the majority of its revenue from sales of its technology-based learning products and related proprietary content. Revenue is recognized when products are shipped...

  • Page 62
    ... ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) revenue is recorded. The allowances are estimated utilizing historical information, maximum known exposures and other available information including current retailer inventory levels, sell...

  • Page 63
    ... CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) the expected product lifecycle, and products planned for discontinuation. If actual future usage, demand for the Company's products and anticipated product selling prices were less favorable than those projected by management...

  • Page 64
    ... in order to develop future business and financial forecasts and the related estimates of future net cash flows. Future net cash flows depend primarily on future sales of the Company's products, which are inherently difficult to predict. Research and Development Costs Internal and external research...

  • Page 65
    ... 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. Derivative Financial Instruments The Company transacts business in various foreign currencies, primarily...

  • Page 66
    ... "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. Share-based compensation cost is measured at the grant date based...

  • Page 67
    ... established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for interim or annual reporting periods ending after June 15, 2009. Adoption of...

  • Page 68
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) and Peso. The Company's outstanding foreign exchange forward contracts, all with maturities of approximately one month, had notional values of $13,277, and $21,890 at December 31, 2009 and...

  • Page 69
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) For the years ended December 31, 2009 and 2008, the Company accounted for gains and losses incurred on its ARS investment as follows: Accumulated Other Comprehensive Income (Balance Sheets...

  • Page 70
    ...licensed content costs, consisting primarily of design, artwork, animation, layout, editing, voice, audio 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...

  • Page 71
    ...: December 31, 2009 2008 Royalties payable ...Advertising and promotion ...Employee-related expenses ...Manufacturing and warehousing ...Marketing, consulting and web-related ...Deferred revenue ...One-time termination benefits ...Facilities-related closure costs ...Other ...Total ... $10,581...

  • Page 72
    ... CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) The total amount of royalty expense related to third-party license agreements was $15,711, $19,315, and $21,768, for 2009, 2008 and 2007, respectively. During the fourth quarter of 2008, the Company implemented a company-wide...

  • Page 73
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) The components of the provision for (benefit from) income taxes were as follows: Years Ended December 31, 2009 2008 2007 Current: Federal ...State ...Foreign ...Total current ...Deferred:...

  • Page 74
    ... operating losses for the most recent three year period, the Company has established a full valuation allowance against its domestic deferred tax assets. The valuation allowance in both 2009 and 2008 includes $8,503 related to excess tax benefits of stock option deductions prior to the adoption of...

  • Page 75
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) 2009, will expire in years 2010 through 2030. In addition, the Company had $2,215 related to excess tax benefits of stock option deductions which are not included in the net operating loss...

  • Page 76
    ... share data) decrease by up to $226 related to its foreign operations over the course of the next twelve months due to expiring statutes of limitations. Of this amount, up to $226 could be recognized as a tax benefit and affect the effective tax rate. Open and Resolved Tax Matters The Company files...

  • Page 77
    ... statement filed with the SEC on July 15, 2009. Under the option exchange program ("the Offer"), the Company offered to exchange, for new lower-priced options, certain outstanding options previously granted under either our 2002 Equity Incentive Plan or 2002 Non-Employee Director Stock Award Plan...

  • Page 78
    ... ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) In accordance with the Offer, except as described below for the Company's CEO and members of the board of directors, the number of shares subject to each new option grant was determined using...

  • Page 79
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) The Company accounts for stock-based compensation as follows: Stock Options: Stock-based compensation expense is calculated based on the fair value of each award on the grant date. In ...

  • Page 80
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) The assumptions used in the Black-Scholes option valuation model and the weighted average grant date fair value per share for the three years ended December, 31, 2009, 2008 and 2007 were ...

  • Page 81
    ...in the Company's stock option plan for the years ended December 31, 2009 and 2008 was as follows: Weighted Average Exercise Price Average Remaining Contractual Life in Years Aggregate Intrinsic Value Number of Shares Stock options: Outstanding at December 31, 2007 ...Grants ...Exercises ...Retired...

  • Page 82
    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 $3.91 and $3.50 as ...

  • Page 83
    ... of Class A and Class B common stock. The terms of the Company's asset-backed line of credit facility prohibit the payment of cash dividends. From the inception of the Company through the date of this report, no dividends have been declared or paid and management has no plans at this time to pay...

  • Page 84
    ... entity controlled by Lawrence J. Ellison, the Chief Executive Officer of Oracle Corporation. In 2009 and 2008, the Company purchased software products and support services totaling $856 and $1,095, respectively, from Oracle Corporation on terms the Company believes are comparable to those it would...

  • Page 85
    ... United States. Credit is extended based on an evaluation of the customers' financial condition; generally, collateral is not required. Allowances for credit losses are provided for in the consolidated financial statements at the time of sale. Three major retailers account for 61% and 66% of total...

  • Page 86
    ... ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) Customer Concentration A limited number of customers historically have accounted for a substantial portion of our gross sales. For the last three fiscal years, the Company's top three customers...

  • Page 87
    ...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 localization and marketing of electronic educational hardware products and related software originally developed for...

  • Page 88
    ...TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) The table below shows certain information by segment for the years ended December 31, 2009, 2008 and 2007. Years Ended December 31, 2009 2008 2007 Net sales: United States ...International ...Totals ...Income (Loss) from...

  • Page 89
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) 20. Selected Quarterly Financial Information-Unaudited Unaudited selected financial information by quarter for the years ended December 31, 2009 and 2008 is presented below. March 31 For ...

  • Page 90
    ...of directors, management and other personnel, 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 and includes those policies and procedures that...

  • Page 91
    ... 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 of December 31, 2009, the end of our fiscal year. Management based its...

  • Page 92
    ... our employees and directors, including our Chief Executive Officer, Chief Financial Officer, who is our principal financial officer, and our Vice President, Corporate Controller, who is our principal accounting officer. In August 2006, our Board adopted a number of versions of our Code of Business...

  • Page 93
    ...-Employee Directors' Stock Award Plan as of December 31, 2009: Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance...

  • Page 94
    ... AND FINANCIAL SCHEDULES (1) Financial Statements: The following are filed as a part of Item 8 of this Annual Report on Form 10-K: Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of...

  • Page 95
    ... 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: February 22, 2010...

  • Page 96
    ... Chairman of the Board, Chief Executive Officer (Principal Executive Officer), and President Chief Financial Officer (Principal Financial Officer) Vice President and Corporate Controller (Principal Accounting Officer) Vice Chairman and Director February 22, 2010 /s/ WILLIAM B. CHIASSON William...

  • Page 97
    ... financial 10-Q 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 Employee Equity Participation Plan Amended and Restated 2002 Equity Incentive Plan Form of Stock Option...

  • Page 98
    ... Original Exhibit File No. Number Filing Date Filed Herewith 10.12* Form of Performance Share Award Agreement under the 2002 Equity Incentive Plan Amended and Restated 2002 Non-Employee Directors Stock Award Plan Form of Nonstatutory Stock Option Agreement under the 2002 Non-Employee Directors...

  • Page 99
    ... Reference Original Exhibit File No. Number Filing Date Filed Herewith 10.26 Amended and Restated Loan and Security Agreement dated August 13, 2009 by and among LeapFrog, certain financial institutions ("Lenders") and Bank of America, N.A., as agent for the Lenders. Technology License Agreement...

  • Page 100
    ... under the heading "Compensation of Directors" in LeapFrog's definitive proxy materials filed with the Securities and Exchange Commission on June 15, 2009 and in LeapFrog's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 19, 2009 incorporated herein by reference...

  • Page 101
    ... ...Allowance for defective products, end of year ...Allowance for sales returns, beginning of year ...Additions charged to operations ...Net deductions ...Allowance for sales returns, end of year ...Allowance for chargebacks and price changes, beginning of year ...Additions charged to operations...

  • Page 102
    ... 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 Chairman and Chief Executive Officer b) Date: February 22, 2010

  • Page 103
    ... 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/ William B. Chiasson William B. Chiasson Chief Financial Officer b) Date: February...

  • Page 104
    ... Katz, the Chief Executive Officer of LeapFrog Enterprises, Inc. (the "Company"), and William B. Chiasson, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge: 1. The Company's Annual Report on Form 10-K for the year ended December 31, 2009, to which...

  • Page 105
    ... for the annual meeting is April 7, 2010. Only stockholders of record at the close of business on that date may vote at the meeting or any postponement or adjournment thereof. As we did in 2009, we are providing our stockholders with access to the proxy materials over the Internet using the "Notice...

  • Page 106

  • Page 107
    ... 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 April 7, 2010 will be entitled to vote at the annual meeting. On the record date, there...

  • Page 108
    ..." the ratification of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2010. The board of directors knows of no other matters that will be presented for consideration at the annual meeting. If any other matter is properly presented at the...

  • Page 109
    ...year's annual meeting? To be considered for inclusion in next year's proxy materials, your proposal must be submitted in writing by December 22, 2010 to our Corporate Secretary at 6401 Hollis Street, Emeryville, California... of the New York Stock Exchange on which your broker may vote shares held in ...

  • Page 110
    ... date, there were 37,068,857 shares of Class A common stock outstanding and 27,140,794 shares of Class B common stock outstanding, all of which are entitled to vote and represent a total 308,476,797 votes. Thus, holders of shares representing at least 154,238,399 votes must be present in person...

  • Page 111
    ..." in Item 1A of our 2009 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 22, 2010. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate...

  • Page 112
    ...by our board of directors as of March 1, 2010 in connection with his appointment as our Chief Executive Officer and President. LeapFrog's policy is to encourage nominees for director to attend the annual meeting of stockholders. Three directors attended our 2009 annual meeting. Directors are elected...

  • Page 113
    ...the Massachusetts Institute of Technology. Mr. Katz's recent service as President and Chief Executive Officer of LeapFrog means that he can contribute a deep understanding of the company's day-to-day operations to the board, and his role as Executive Chairman includes a management advisory role. His...

  • Page 114
    ...number of technology, toy and education ventures, and brings extensive experience with electronic gaming and toys to LeapFrog and its board of directors. He has extensive experience in the toy industry, having served as Chief Executive Officer of Mattel, a leading toy manufacturer and public company...

  • Page 115
    ... financial officer duties, been responsible for corporate development for a number of years, executing many acquisitions, investments and joint ventures, both domestically and internationally. His experience in the electronic game business, including both content development and retail distribution...

  • Page 116
    ... international retail holdings such as DFS, Sephora and Miami Cruiseline Services. He also served as the Chief Financial Officer for DFS, Gump's and Cost Plus. Since October 2003, Mr. Wang has served on the board of directors of bebe stores, inc., a publicly held company that designs, develops...

  • Page 117
    ...of a public company. He is a "financial expert," as defined in applicable SEC rules, based on his formal education and substantial experience in the field. Mr. Wang's experience as an executive officer of various consumer products and retail companies and as a director of public companies other than...

  • Page 118
    ... the fiscal year ending December 31, 2010, 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 119
    ... 2007 research and development credits. There were no fees paid to Ernst & Young LLP for tax services in 2008. All Other Fees There were no other fees paid to Ernst & Young LLP in 2009 and 2008. Pre-Approval Procedures of Audit and Non-Audit Services by the Independent Registered Public Accounting...

  • Page 120
    ... exercise of stock options held by that person that are immediately exercisable or exercisable within 60 days of March 31, 2010. These shares are deemed to be outstanding and to be beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially...

  • Page 121
    ... stock and 27,140,794 shares of Class B common stock outstanding as of March 31, 2010. 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 122
    ...for Met Investors is 5 Park Plaza, Suite 1900, Irvine, California 92614. (11) Includes 1,172,375 shares of Class A common stock issuable to Mr. Katz upon the exercise of options that are exercisable within 60 days after March 31, 2010. (12) Includes 126,838 shares of Class A common stock issuable to...

  • Page 123
    ... upon the exercise of options that are exercisable within 60 days after March 31, 2010. Ms. MacIntyre departed from LeapFrog in February 2010, but her vested options remain exercisable for 12 months after her departure date. (16) Includes 71,043 shares of Class A common stock issuable to Mr. Wong...

  • Page 124
    .... Includes 41,083 shares of Class A common stock held by our executive officers who are not named in the table. Also includes 205,580 shares of Class A common stock issuable upon the exercise of options that are exercisable within 60 days after March 31, 2010 held by executive officers who are not...

  • Page 125
    ... of our voting power. In 2009, we purchased software products and support services from Oracle Corporation totaling approximately $860,000. As of March 31, 2010, Lawrence J. Ellison, the Chief Executive Officer of Oracle Corporation, may be deemed to have had or shared the power to direct the voting...

  • Page 126
    ...and (for a portion of 2009) Ellison, who beneficially owned, as of March 31, 2010, shares representing, respectively, approximately 30.6%, 16.7% and 52.4% of our voting power. (For purposes of these percentages, which are determined in accordance with SEC rules based on information furnished by each...

  • Page 127
    ... number of meetings of the board and of the committees on which the director served that were held during the portion of the last fiscal year in which he was a director or committee member. In fiscal 2009 the non-management members of our board of directors met four times in executive sessions...

  • Page 128
    ... board members and management, reviewing and approving materials to be sent to the board, working with management and other directors to develop agendas for board meetings, helping build consensus on proposed board actions, and serving as the chair of board meetings. In his position as Executive...

  • Page 129
    ... questions of our executive team concerning material risks we face and how we plan to manage them, and guide management's actions with respect to such risk management. • Our audit committee reviews and discusses at regular meetings throughout the year our risk management policies and processes and...

  • Page 130
    ...11, "Stock-Based Compensation," of Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. (3) At December 31, 2009, the following non-employee directors each held stock awards and stock options covering the following aggregate numbers of shares...

  • Page 131
    ... options issued to our non-employee directors in the option exchange program was $6.25 per share. The assumptions made in the valuation of the option awards are discussed in Note 11, "Stock-Based Compensation," of Notes to Financial Statements included in our Annual Report on Form 10-K for the year...

  • Page 132
    ...an option to purchase 30,000 shares of our Class A common stock and the annual grant will be 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 Chair of our board of directors at the time of the annual grant will...

  • Page 133
    ... committee to advise on director and executive compensation issues. In accordance with our equity award grant policy, these options were granted as of May 15, 2009, with an exercise price of $2.75 per share and a three-year vesting schedule. In addition, to provide appropriate incentives to enhance...

  • Page 134
    ... governance committee. The following table provides membership and meeting information for each of the board committees in fiscal 2009: Nominating and Corporate Governance Member of our board of directors in the fiscal year 2009 Audit Compensation Paul T. Marinelli(1) ...Stanley E. Maron...

  • Page 135
    ... by law; confers with management and the independent registered public accounting firm regarding the effectiveness of internal control over financial reporting; reviews, assesses and approves the annual audit plan for LeapFrog's internal audit function; establishes procedures, as required under...

  • Page 136
    ... on the review and discussions referred to above, the audit committee recommended to the board that the audited consolidated financial statements be included in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for filing with the Securities and Exchange Commission...

  • Page 137
    ... and the total number of shares that may be granted in any given year. Our policy is that we will not time or select the grant dates for any stock options or stock-based awards in coordination with the release by us of material non-public information, nor will we have any program, plan or practice...

  • Page 138
    ... other than compensation consulting services related to determining or recommending the form or amount of executive and director compensation, designing and implementing incentive plans and providing information on industry and peer group pay practices, which services were provided directly to our...

  • Page 139
    ... of the committees of the board, assessing the performance of management and the board, reviewing the compensation paid to non-employee directors for their service on our board and its committees, and developing a set of corporate governance principles for LeapFrog. Our governance committee is...

  • Page 140
    ...the following address: Chair of the nominating and corporate governance committee c/o Corporate Secretary of LeapFrog at 6401 Hollis Street, Emeryville, California 94608, at least 120 days prior to the anniversary date of the mailing of our proxy statement for the last annual meeting of stockholders...

  • Page 141
    ...Street, Emeryville, California 94608. CODE OF ETHICS 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...

  • Page 142
    ... describes our executive compensation program and the compensation policies and decisions that we made in 2009 for Jeffrey G. Katz, currently a non-management director (Chief Executive Officer and President, or CEO, in 2009); William B. Chiasson, our current CEO (Chief Financial Officer, or CFO...

  • Page 143
    ...through our company-wide Section 401(k) plan. Ensure our pay programs avoid incentives that might lead to excessive risk-taking. • • • Executive Compensation Decisions Role of Compensation Committee and Management Our compensation committee is responsible for the design, implementation, and...

  • Page 144
    ...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 following companies comprised the direct peer group in 2009...

  • Page 145
    ... market data for the position provided by a compensation consultant and then adjusted to reflect the specific performance, contributions and experience of the individual. Each year, the compensation committee evaluates the total compensation of our executives with respect to our overall company...

  • Page 146
    ... on his new role as President of Sales and Marketing. Performance-Based Bonuses We use performance-based bonuses to motivate our executives to achieve our short-term financial and operational goals and to reward exceptional company and individual performance. In 2009, our bonus plan was designed to...

  • Page 147
    ...total company performance...year, of an operating income or loss goal as established by the compensation committee in August 2009. Threshold, target, and "stretch" levels for operating income or loss were established based on our 2009 operating plan and data regarding our financial results and business...

  • Page 148
    ...officer, in part with respect to overall achievement of his or her respective goals for the year, and in part with respect to the contributions and impact that his or her area of responsibility made to the achievement of key corporate accomplishments. Under the bonus plan, the board and compensation...

  • Page 149
    ... quarter. The compensation committee or the board determined in its discretion whether or not a named executive officer met this requirement based on general job performance in helping the company achieve its strategic goals and in managing the business. The interim performance evaluations for each...

  • Page 150
    ... performance and total equity position, anticipated future contribution to our success, and alignment among similarly situated employees. Restricted Stock Units (RSUs). RSUs represent full-value shares of Class A common stock. Our practice is to grant fewer shares under RSUs as compared to options...

  • Page 151
    ... market price of our Class A common stock on the trading day immediately preceding the date of grant. 2009 Stock Option Awards In April 2009, the board and compensation committee approved stock option grants for senior management and other key contributors, including the named executive officers...

  • Page 152
    ... named executive officers. In accordance with our equity award grant policy, this option was granted as of November 16, 2009. It had an exercise price of $4.04 per share and a four-year vesting schedule. Stock Option Exchange Program In June 2009, our board approved a "value-for-value" stock option...

  • Page 153
    ...550 shares of Class A common stock. The stock options surrendered and new options received by each named executive officer under the stock option exchange program were as follows: Surrendered Options Exercise Prices (Range) Surrendered Options Total Shares New Option Total Shares New Option Exercise...

  • Page 154
    ... to participate in our Section 401(k) plan and employee stock purchase plan, on the same general conditions as are made available to all our full-time employees. We do not offer our executive or other employees guaranteed retirement or pension benefits. In view of the high cost of housing in the San...

  • Page 155
    ... in Note 11, "Stock-Based Compensation," of Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. To the extent that option awards were granted as part of our value-for-value stock option exchange program in 2008 or 2009, the values for such...

  • Page 156
    ... a named executive officer in fiscal 2007. (14) Mr. Campbell received $2,000 in matching grants made to his 401(k) savings plan. (15) Ms. MacIntyre became our Executive Vice President, Product, Innovation and Marketing, in February 2007, ceased serving as an executive in December 2010, and departed...

  • Page 157
    ... a new title and role for 2010. Grants of Plan-Based Awards in Fiscal 2009 All Other Option Exercise Closing Awards: or Base Market Number Price Price Estimated Future Payouts Estimated Future Payouts of of on Under Non-Equity Incentive Under Equity Incentive Securities Option Grant Plan Awards Plan...

  • Page 158
    ... business day that the NYSE is open). In the case of options granted in connection with the stock option exchange program described in footnote 5 below, the grant date was set in accordance with the terms of the exchange program. (2) In February 2009, our board approved the non-equity incentive plan...

  • Page 159
    ..., 2009 table for more details regarding the exchange program. (5) As provided in the 2002 Equity Incentive Plan, we grant options to purchase our Class A common stock at an exercise price equal to the closing market price of our Class A common stock on the trading day immediately preceding the date...

  • Page 160
    ... board or compensation committee. In addition, on March 15, 2010, in accordance with his new employment agreement, Mr. Chiasson was granted (i) an option to purchase 150,000 shares of our Class A common stock at an exercise price of $6.32 per share, and (ii) 150,000 restricted stock units. The stock...

  • Page 161
    ... has a new title and role for 2010. Outstanding Equity Awards at December 31, 2009 Option Awards(1) Stock Awards Equity Equity Incentive Plan Equity Incentive Awards: Incentive Plan Market Plan Awards: Market or Awards: Number of Value of Number of Payout Value Number of Shares or Shares Unearned of...

  • Page 162
    ... not vested as of December 31, 2009. (4) Represents grant of option pursuant to our option exchange program in exchange for cancellation of an option to purchase 22,976 shares originally issued June 9, 2008 under the 2002 Non-Employee Director Stock Award Plan. Option is fully vested and exercisable...

  • Page 163
    ... Class A common stock on the NYSE across all trading days during a consecutive 90-day period that occurred after the grant date and during the term of the option equaled or exceeded $4.00 per share. This price condition was satisfied in March 2010. In addition, the option will vest over four years...

  • Page 164
    ... commencement date, which was March 27, 2006. (23) Represents grant of option pursuant to our option exchange program in exchange for cancellation of an option to purchase 75,000 shares originally issued October 30, 2006 under the 2002 Equity Incentive Plan. Option vests over a four-year period...

  • Page 165
    ... on the one-year anniversary of the date of grant, which was October 30, 2006 and in 36 equal monthly installments thereafter. (36) Represents grant of option pursuant to our option exchange program in exchange for cancellation of an option to purchase 9,000 shares originally issued March 15, 2007...

  • Page 166
    ...vest in 10 equal monthly installments commencing June 27, 2009. (48) Represents grant of option pursuant to our option exchange program in exchange for cancellation of an option to purchase 50,071 shares originally issued June 9, 2008 under the 2002 Equity Incentive Plan. Options vest as follows: 19...

  • Page 167
    ...to the named executive officers. The table reflects titles of each individual for 2009. As discussed under "Overview" above, each of Messrs. Katz, Chiasson, Dodd and Campbell each has a new title and role for 2010. Option Exercises and Stock Vested in Fiscal 2009 Option Awards Number of Shares Value...

  • Page 168
    ...to which the market value of our Class A 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 169
    ...his covered dependents, while he was providing consulting services to LeapFrog. Assuming a termination date of December 31, 2009, the total consulting fees to be paid to Mr. Katz would have been approximately $2,601,000 and the payments to maintain group health insurance coverage for himself and his...

  • Page 170
    ... LeapFrog in which Mr. Dodd does not hold the senior-most position in his functional area in the surviving top-most parent company (excluding any company that is an investment fund or other non-operating company), whether public or private, and does not report directly to the chief executive officer...

  • Page 171
    ...a less than full time basis), for a period of six months (or a shorter period as LeapFrog or its successor determines) in order to provide transition support to LeapFrog or its successor. Under the Severance Plan, to resign for good reason, an employee must resign within 60 days after the occurrence...

  • Page 172
    ... options from the standard three months to twelve months from the date of the cessation of their continuous service, as defined in the 2002 Equity Incentive Plan. Finally, as described in "Executive Compensation-Compensation Discussion and Analysis- Elements of Executive Compensation-Performance...

  • Page 173
    ... applicable to our officers, directors and greater than ten percent beneficial owners were filed in a timely manner. On May 19, 2009, Paul T. Marinelli filed a beneficial ownership report on Form 4 disclosing an automatic grant of a stock option to purchase Class A common stock granted to Mr...

  • Page 174
    ... to the SEC. Information contained on or accessible through our website or contained on other websites is not deemed to be part of this proxy statement. In addition, you may request a copy of the Annual Report on Form 10-K in writing by sending an e-mail request to our investor relations department...

  • Page 175
    ... beginning on December 31, 2004 through December 31, 2009 (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 make or endorse any...

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    ... STOCK Continental Stock Transfer & Trust New York, New York (212) 509-4000 ANNUAL MEETING The 2010 Annual Meeting of Stockholders will take place at 9:00 a.m. Pacific time on Thursday, June 3, 2010, at the company's headquarters in Emeryville, California. INVESTOR RELATIONS LeapFrog Enterprises...

  • Page 180
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