LeapFrog 2012 Annual Report Download

Download and view the complete annual report

Please find the complete 2012 LeapFrog annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 153

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153

2012 Annual Report
Helping children
achieve their potential

Table of contents

  • Page 1
    Helping children achieve their potential 2012 Annual Report

  • Page 2
    We know learning. We know kids. During our 18-year heritage, LeapFrog has helped millions of children achieve their potential. Our learning solutions provide fun and engaging entertainment filled with rich, nutritious education. We know innovation. We know quality. We know parents.

  • Page 3
    ... as well. Much more important than any award, throughout our history we have helped millions of children on their educational journeys, having sold more than 55 million learning platforms, 100 million books, 60 million games, apps and downloadable videos and 100 million learning toys. In 2012, we...

  • Page 4
    ... of the best kids' entertainment companies. Additionally, we are making significant investments to build an online community with parents as well as improve our online tools to provide parents with even richer, more personalized insight about their child's learning progress. Our world-class team is...

  • Page 5
    ... market-leading products and exciting new product launches in 2013, including a new learn-to-read and write system, new iPhone and iPad app activity products, new LeapPad tablets and hundreds of new content titles. In 2013, we will make significant investments in content, online communities, systems...

  • Page 6
    ... aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2012, calculated using the closing sale price as of that day, was approximately $453.4 million. Shares of common stock held by each executive officer and director of the registrant and by each person...

  • Page 7
    ... share data and percentages. TRADEMARKS AND SERVICE MARKS COUNTING CANDLES, LEAP, LEAPFROG, the LeapFrog logos, the LeapFrog Connect logo, the LeapFrog Learning Path logo, the LeapFrog School logo, the LeapFrog LeapSchool logo, the LeapFrog Scout & Friends logo, LEAPPAD, LEAPPAD2, LEAPPAD EXPLORER...

  • Page 8
    ... 66 66 67 68 68 68 69 69 70 71 72 73 A-1 A-1 PART III Item 10. Directors, Executive Officers and Corporate Governance ...Item 11. Executive Compensation ...Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Item 13. Certain Relationships and...

  • Page 9
    ... Our product portfolio consists of multimedia learning platforms and related content and learning toys. We have developed a number of learning platforms, including the LeapPad family of learning tablets, the Leapster family of handheld learning game systems and the Tag and Tag Junior reading systems...

  • Page 10
    ... in 2010 and designed for children ages four to nine, is a handheld learning game system featuring 512 megabytes of memory as well as optional attachments such as a camera and recharger pack. Leapster Explorer is compatible with both cartridges and App Center content. Tag: Our Tag reading system...

  • Page 11
    ... exploration of board books with Tag Junior through Tag adventures that bring reading skills to life. These books, maps and games feature LeapFrog-owned characters and popular licensed characters as well. Learning Toys: Our learning toys are intended to support development of a number of important...

  • Page 12
    ... our App Center, through which customers may directly purchase downloadable digital content with a personal credit card, PayPal or with App Center cards sold at retailers or our online store. During 2012, we added features including the ability to access and make purchases via a web browser instead...

  • Page 13
    ... on the cost of our components and raw materials and our ability to obtain these in suffıcient quantities from our suppliers or alternative sources.'' Research and Development We design our multimedia learning platforms and related content, learning toys, and online services using a combination of...

  • Page 14
    ... content and web applications hosted by third parties. Advertising and Marketing Our advertising and marketing strategy is designed to position LeapFrog as a leader in providing engaging, effective, and fun educational entertainment for children and to promote a strong brand that parents seek...

  • Page 15
    ... 100% Seasonal purchasing patterns and their related production lead times create risk in our business due to possible under-production of popular items and over-production of items that do not match consumer demand. In addition, our retail customers continue to manage their inventories stringently...

  • Page 16
    ...2008 to August 2010. From October 2006 to October 2008, Mr. Barbour served as the Managing Partner of Volta Capital, LLC, a strategy and investment consulting firm. From 1999 to June 2006, Mr. Barbour was employed by Toys ''R'' Us, Inc., a leading retailer of children's toys and products. He served...

  • Page 17
    ... Officer since June 2012. Prior to joining LeapFrog, Mr. Ahearn was Senior Vice President and Chief Marketing Officer of Toys ''R'' Us, Inc. where he was responsible for all aspects of marketing, advertising, and promotions, including strategy, media analysis, brand position, and creative services...

  • Page 18
    ... download content for use with some of our products directly from us instead of purchasing game cartridges from our retailers. In addition, some of the key products launched in recent years, including our 2012 release of the LeapPad2 and associated content on our App Center, have a high price point...

  • Page 19
    ... mobile devices and mobile game platforms. Each of these markets is very competitive and we expect competition to increase in the future. For example, in 2012 our LeapPad products faced competition from several tablets designed for children and from general-purpose tablets made by major electronics...

  • Page 20
    ... customers could be inconvenienced or become dissatisfied with our products. Any significant disruption to our App Center, website, internal computer systems, or those of our third-party service providers, or malfunctions related to transaction processing on our online store or content management...

  • Page 21
    ... stories, music, illustrations and trade names, and for technologies we incorporate in our products including key technology used in our Tag and Tag Junior reading systems. In particular, we rely on our ability to acquire rights to popular entertainment media properties for content on our multimedia...

  • Page 22
    ... product replacement, as well as the cost of defending against litigation related to the defective products. Further, as a result of recent recalls and safety issues related to products of a number of manufacturers in the toy industry, some of our retail customers have been increasing their testing...

  • Page 23
    ... the appeal of our products in international markets; difficulties managing and maintaining relationships with vendors, customers, retailers, distributors and other commercial partners; increased investment and operational complexity to make our App Center compatible with the systems in various...

  • Page 24
    ... customers, for our manufacturers to deliver products to us, or for suppliers to provide component parts. The loss of members of our executive management team or other key employees could adversely affect our business. We had a number of changes to our executive management team during 2012 and 2011...

  • Page 25
    .... ITEM 2. PROPERTIES The table below lists our current significant properties. In addition, we have leased properties for administration, sales and operations in Canada, England, France, Mexico and China, which are primarily used by our International Segment. Location Use Segment Condition Type of...

  • Page 26
    ...New York Stock Exchange (''NYSE'') under the symbol ''LF.'' On February 15, 2013, there were 2,601 holders of record of our Class A common stock and seven 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 27
    ...63.6 63.6 (1) Includes a tax benefit due to the release of valuation allowances. Refer to Note 10, ''Income Taxes'' for additional information. * Weighted-average shares outstanding of Class A and Class B common stock 2012 2011 2010 (In millions) 2009 2008 Consolidated Balance Sheet Cash and cash...

  • Page 28
    ... Our product portfolio consists of multimedia learning platforms and related content and learning toys. We have developed a number of learning platforms, including the LeapPad family of learning tablets, the Leapster family of handheld learning game systems and the Tag and Tag Junior reading systems...

  • Page 29
    ... affected by foreign currency exchange rates. Cost of sales for 2012 increased 25% compared to 2011. The increase was primarily driven by higher sales volume, higher product costs associated with sales mix, higher royalty costs resulting from an increase in licensed content sold, and a full year of...

  • Page 30
    ... higher sales of lower-margin multimedia learning platforms, specifically LeapPad, partially offset by lower trade allowances and discounts. Operating expenses for 2011 decreased 5% compared to 2010, primarily driven by an overall planned decrease in marketing, advertising and promotional spending...

  • Page 31
    ... of costs associated with marketing, advertising and promoting our products, including customer-related discounts and promotional allowances. 2012 2011 % Change 2010 2012 vs. 2011 (Dollars in millions) % Change 2011 vs. 2010 Advertising expenses ...As a percent of net sales ...* Percentage point...

  • Page 32
    ... consumer demands, increasing pace of technological innovation, significant product, retailer and seasonal revenue concentrations, transition at the highest levels of our management, and unproven new product pipeline, we could not project future earnings beyond 2013, at a more-likely-than-not...

  • Page 33
    ... retailers, other retail stores, distributors, resellers, and online channels including our online store and App Center. Certain corporate-level operating expenses associated with sales and marketing, product support, human resources, legal, finance, information technology, corporate development...

  • Page 34
    ...retailers and other outlets through our offices in the United Kingdom, France, Canada and Mexico and through distributors in markets such as Australia, South Africa and Spain, as well as through our online store. Certain corporate-level operating expenses associated with sales and marketing, product...

  • Page 35
    ... for the LeapPad learning tablet and associated content in certain international markets. Net sales for 2011 included a 2% positive impact from changes in currency exchange rates. Cost of sales for 2011 increased 23% compared to 2010. The increase was primarily driven by higher sales volume. Gross...

  • Page 36
    ... credit facility. Future capital expenditures are primarily planned for new product development and purchases related to the upgrading of our information technology capabilities. We expect that capital expenditures in 2013, including those for capitalized content and website development costs...

  • Page 37
    ... due to an increase in employee option exercises, partially offset by higher payroll taxes related to an increase in employee restricted stock units released in 2011 as compared to 2010. Seasonal Patterns of Cash Provided by (Used in) Operations The table below shows our seasonal patterns of...

  • Page 38
    ... download content is granted to the customer upon redemption of the card. For content purchased by the customer with a personal credit card directly through our App Center, we recognize revenue when the right to download content is granted. Amounts billed to customers for shipping and handling costs...

  • Page 39
    ... external costs related to the development of content for our learning products, including design, artwork, animation, layout, editing, voice, audio and apps included in the learning products. Such costs are capitalized once the technological feasibility of the product is established and costs are...

  • Page 40
    ... management to exercise judgment in selecting an appropriate discount rate and to make numerous assumptions in order to develop future business and financial forecasts and the related estimates of future net cash ï¬,ows. Future net cash ï¬,ows depend primarily on future sales of our products...

  • Page 41
    ... or loss reported in our financial statements, but the program, when properly executed, may not always eliminate our exposure to movements of currency exchange rates. The results of our hedging program for the fiscal years ended December 31, 2012, 2011 and 2010 are summarized in the table below...

  • Page 42
    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, 2012 Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets ...Consolidated Statements of ...

  • Page 43
    ... in all material respects, the information set forth therein. 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, 2012, based on criteria...

  • Page 44
    ... reporting as of December 31, 2012, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LeapFrog Enterprises, Inc. as of December 31, 2012 and 2011 and the related...

  • Page 45
    ... per share data) 2012 December 31, 2011 ASSETS Current assets: Cash and cash equivalents ...Accounts receivable, net of allowances for doubtful $659, respectively ...Inventories ...Prepaid expenses and other current assets ...Deferred income taxes ...Total current assets ...Long-term investments...

  • Page 46
    ... OF OPERATIONS (In thousands, except per share data) 2012 Years Ended December 31, 2011 2010 Net sales ...Cost of sales ...Gross profit ...Operating expenses: Selling, general and administrative Research and development ...Advertising ...Depreciation and amortization ...Total operating expenses...

  • Page 47
    LEAPFROG ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 31, 2012 2011 2010 Net income ...Other comprehensive income (loss), before tax: Currency translation adjustments ...Transfer of temporary gain on long-term investments ...Total other ...

  • Page 48
    ..., December 31, 2011 . . Conversion of Class B shares to Class A shares ...Class A common shares issued upon exercise of employee stock-based awards and purchases made under the employee purchase plan ...Net cash paid for payroll taxes on restricted stock unit releases ...Stock-based compensation...

  • Page 49
    ... activities: Proceeds from stock option exercises and employee stock purchase plan ...Net cash paid for payroll taxes on restricted stock unit releases Borrowing on line of credit ...Payment on line of credit ...Net cash provided by financing activities ...Effect of exchange rate changes on cash...

  • Page 50
    .... The Company's product portfolio consists of multimedia learning platforms and related content and learning toys. LeapFrog has developed a number of learning platforms, including the LeapPad family of learning tablets, the Leapster family of handheld learning game systems and the Tag and Tag Junior...

  • Page 51
    ..., except per share data) Revenue Recognition The Company derives the majority of its revenue from sales of its technology-based learning products and related proprietary and licensed content. Revenue is recognized when products are shipped and title passes to the customer, provided that there is...

  • Page 52
    ... Capitalized Product Costs The Company capitalizes certain external costs related to the development of content for its learning products, including design, artwork, animation, layout, editing, voice, audio and apps included in the learning products. Such costs are capitalized once the technological...

  • Page 53
    ... Company's future net sales is expected to be generated by both mature products as well as products introduced in 2012 or planned to be introduced in 2013. Research and Development Costs Internal and external research and development costs incurred before a project reaches technological feasibility...

  • Page 54
    ... share data) through U.S. Dollar-denominated sales by the Company's foreign affiliates. The hedging program is designed to reduce, but does not always eliminate, the impact of the remeasurement of balance sheet items due to movements of currency exchange rates. LeapFrog does not use forward exchange...

  • Page 55
    ... Non-Employee Directors' Stock Award Plan (''NEDSAP''), the Company issues stock options and restricted stock units (''RSUs'') to its employees, directors and occasionally to non-employee service providers, to purchase shares of the Company's Class A common stock. Stock-based compensation cost is...

  • Page 56
    ..., 2012. As of December 31, 2011, the Company's Level 3 assets consisted of investments in auction rate securities (''ARS''), for which the Company engaged a third-party valuation firm to assist in the estimation of the fair value using a discounted cash ï¬,ow approach. The following table presents...

  • Page 57
    ... 31, 2012, 2011 and 2010, respectively. 6. Capitalized Product Costs The Company's capitalized product costs include external costs related to the development of content for its learning products and external website development costs for its website. The Company's capitalized product costs as of...

  • Page 58
    ... in 2013 and $50 in 2014. 9. Accrued Liabilities The Company's accrued liabilities as of December 31, 2012 and 2011 were as follows: December 31, 2012 2011 Employee-related expenses ...Advertising and promotion ...Royalties payable ...Manufacturing and warehousing ...Marketing, consulting and web...

  • Page 59
    ... (In thousands, except per share data) Employee-related expense accruals increased primarily due to greater achievement against Company performance targets set as a part of the Company's employee bonus programs for 2012 as compared to 2011. 10. Income Taxes The Company's income before taxes included...

  • Page 60
    ... losses in prior years, rapidly changing consumer demands, increasing pace of technological innovation, significant product, retailer and seasonal revenue concentrations, transition at the highest levels of its management, and unproven new product pipeline, the Company could not project future 52

  • Page 61
    ... 31, 2012 and will expire in years 2013 through 2029. Section 382 of the Internal Revenue Code limits net operating loss carryforwards when an ownership change of more than fifty percent of the value of the stock in a loss corporation occurs within a three-year period. Sales of the Company's common...

  • Page 62
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) However, an additional $14,309, $14,306 and $14,382, respectively, of domestic tax benefit would impact the Company's effective rate if recognized, provided the valuation allowance ...

  • Page 63
    ... the sole plan for providing stock-based incentive compensation to eligible employees and consultants. On the effective date of the 2011 EIP, a total of 6,000 newly approved shares of Class A common stock became available for grant under the 2011 EIP and any shares remaining available for new grants...

  • Page 64
    ...grant date with a maturity closest to the expected term of the stock option. Expected Term: The expected life of the options represents the period of time the options are expected to be outstanding. Expected Dividend: The dividend yield is zero as the Company does not expect to pay dividends. Annual...

  • Page 65
    ...% is currently being used, reï¬,ecting historical and expected future forfeiture rate. Stock-based compensation expense related to RSUs is calculated based on the market price of the Company's common stock on the grant date. The total market value of RSUs granted in 2012, 2011 and 2010, as measured...

  • Page 66
    ...per share data) Stock Plan Activity Stock Options The activity in the Company's stock option plan for the years ended December 31, 2012, 2011 and 2010 was as follows: Average Remaining Contractual Life in Years Aggregate Intrinsic Value Number of Shares Weighted-Average Exercise Price Outstanding...

  • Page 67
    ... by the former Chief Executive Officer in connection with his resignation as an officer and employee of the Company. The total fair value of shares vested in 2012, 2011 and 2010 was $3,854, $3,255 and $1,348, respectively. As of December 31, 2012, unrecognized compensation cost related to RSUs...

  • Page 68
    ... the New York Stock Exchange (''NYSE''), as Mollusk Holdings, LLC (''Mollusk''), a related party, held more than 50% of the voting power of the Company's outstanding shares. On December 27, 2011, Mollusk converted, on a one-to-one basis, 3,704 shares of the Company's Class B common stock into shares...

  • Page 69
    ...'s Class B common stock and 1.6 million shares of the Company's Class A common stock, which represents approximately 12.5% of the combined voting power of the Company's Class A common stock and Class B common stock. In 2012, 2011 and 2010, the Company purchased software products and support services...

  • Page 70
    LEAPFROG 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 the Company's gross sales. For the last three fiscal years, the Company's top...

  • Page 71
    ..., design, sales and marketing of multimedia learning platform products and related content, and learning toys, sold primarily through retail and distributor channels and through the Company's website in the U.S. In addition, beginning in late 2011, this segment began distributing third-party content...

  • Page 72
    ... net sales. The table below shows the net sales of the Company's product portfolio by segment for the years ended December 31, 2012, 2011 and 2010: 2012 % Years Ended December 31, 2011 % 2010 (Dollars in millions) % SEGMENTS United States: Multimedia learning platforms Learning toys ...All...

  • Page 73
    ... per share data) 21. Selected Quarterly Financial Information - Unaudited Unaudited selected financial information by quarter for the years ended December 31, 2012 and 2011 is presented below: March 31 For 2012 Quarters Ended June 30 September 30 December 31(1) Full Year 2012 Net sales ...Gross...

  • Page 74
    ...include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions...

  • Page 75
    ...issues, if any, within a company have been detected. Moreover, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that...

  • Page 76
    ... of the Securities Exchange Act of 1934, as amended, also referred to in this Annual Report on Form 10-K as our 2013 Proxy Statement, which we expect to file with the SEC no later than April 30, 2013. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information appearing in our...

  • Page 77
    ... Plan Information The following table shows certain information concerning our Class A common stock reserved for issuance in connection with our 2002 EIP, 2011 EIP, NEDSAP and ESPP, as of December 31, 2012: Number of securities remaining available for future issuance under equity compensation plans...

  • Page 78
    ..., FINANCIAL STATEMENT 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...

  • Page 79
    ... Securities 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/ Raymond L. Arthur Raymond L. Arthur Chief Financial Officer and Principal Financial Officer Date: March 11, 2013...

  • Page 80
    ... to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ JOHN BARBOUR John Barbour /s/ RAYMOND L. ARTHUR Raymond L. Arthur /s/ SARAH...

  • Page 81
    ... Hawaii Investor LLC, and LeapFrog Enterprises, Inc. dated as of March 29, 2010 Amended and Restated 2002 Employee Stock Purchase Plan Amended and Restated 2002 Equity Incentive Plan Form of Stock Option Agreement under the 2002 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement...

  • Page 82
    ... Inc. and its Board of Directors††Amendment to Executive Management Severance and Change in Control Benefit Plan dated March 30, 2010 between Michael J. Dodd and LeapFrog Enterprises, Inc. Letter Agreement with Michael J. Dodd dated September 29, 2010 Employment Agreement, dated as of February...

  • Page 83
    Incorporated by Reference Exhibit Number Original Exhibit Number Filed Herewith Exhibit Description Form File No. Filing Date 10.28* 10.29 10.30 10.31 10.32 10.33 10.34 10.35 10.36 Offer Letter, dated July 5, 2012, by and between LeapFrog Enterprises, Inc. and Raymond L. Arthur ...

  • Page 84
    ...May 1, 2012 by and among LeapFrog Enterprises, Inc., certain financial institutions and Bank of America, N.A. List of Subsidiaries Consent of Independent Registered Public Accounting Firm Power of Attorney (see signature page to this Form 10-K) Certification of the Chief Executive Officer Pursuant...

  • Page 85
    ... under the heading ''Executive Compensation'' in the definitive proxy materials filed by LeapFrog Enterprises, Inc. with the Securities and Exchange Commission on April 19, 2012 and incorporated herein by reference. ††Description contained under the heading ''Director Compensation'' in the...

  • Page 86
    ...End of Year Allowance 2012 ...2011 ...2010 ...Allowance 2012 ...2011 ...2010 ...Allowance 2012 ...2011 ...2010 ...Allowance changes 2012 ...2011 ...2010 ...Allowance 2012 ...2011 ...2010 ...Allowance 2012 ...2011 ...2010 ... for doubtful accounts receivable ...for promotional ...markdowns ... $ 659...

  • Page 87
    ... 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/ John Barbour John Barbour Chief Executive Officer b) Date: March 11, 2013

  • Page 88
    ... 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/ Raymond L. Arthur Raymond L. Arthur Chief Financial Officer b) Date: March 11, 2013

  • Page 89
    ... of 2002, John Barbour, the Chief Executive Officer of LeapFrog Enterprises, Inc. (the ''Company''), and Raymond L. Arthur, the Chief Financial Officer of the Company, each hereby certifies as of the date hereof and solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code...

  • Page 90
    ... invited to attend the annual meeting of stockholders of LeapFrog Enterprises, Inc., a Delaware corporation. The meeting will be held on Wednesday, June 5, 2013 at 9:00 a.m. pacific daylight time at our headquarters located at 6401 Hollis Street, Suite 100, Emeryville, California. Proposals to be...

  • Page 91
    ... BENEFICIAL OWNERS AND MANAGEMENT ...BOARD OF DIRECTORS AND CORPORATE GOVERNANCE . Independence of the Board of Directors ...Board Leadership Structure ...Board Meetings and Executive Sessions ...Role of Board in Risk Oversight ...Committees of the Board ...Audit Committee ...Report of the Audit...

  • Page 92
    ... and Analysis ...Report of the Compensation Committee ...Summary Compensation Information ...Grants of Plan-Based Awards ...Employment Arrangements ...Outstanding Equity Awards at Fiscal Year End ...Option Exercises and Stock Vested ...No Additional Executive Benefit Plans ...Potential Payments...

  • Page 93
    ....leapfrog.com under ''Company Info - Contact Us.'' Who can vote at the annual meeting? Only stockholders of record at the close of business on April 8, 2013, or the record date, will be entitled to vote at the annual meeting. On the record date, there were 63,689,950 shares of Class A common stock...

  • Page 94
    ... using his best judgment. Who is paying for this proxy solicitation? We are paying for the entire cost of soliciting proxies. In addition to these proxy materials, our directors and employees may also solicit proxies in person, by telephone or by other means of communication. Directors and employees...

  • Page 95
    ... date; You may grant a subsequent proxy through our Internet voting site; You may send a written notice that you are revoking your proxy to our Corporate Secretary at 6401 Hollis Street, Suite 100, Emeryville, California 94608-1463; or You may attend the annual meeting and vote in person. Simply...

  • Page 96
    ...if at the meeting there is present in person, by remote communication or represented by proxy the holders of stock representing a majority of the voting power of all outstanding shares of stock entitled to vote. On the record date, there were 63,689,950 shares of Class A common stock outstanding and...

  • Page 97
    ... to August 2010. From October 2006 to October 2008, Mr. Barbour served as the Managing Partner of Volta Capital, LLC, a strategy and investment consulting firm. From 1999 to June 2006, Mr. Barbour served in various capacities for Toys ''R'' Us, Inc., a retailer of children's toys and products. He...

  • Page 98
    ... on building leading companies in areas relating to education, technology and career management and the improvement of individual and corporate performance. From 1990 to 1996, he served as President and Chief Executive Officer of Sega of America, a leading video game and entertainment company. Prior...

  • Page 99
    ... strategic focus on technology-based multimedia learning platforms and provide the board of directors with highly specialized experience and perspective and pertinent strategic and business insight. His deep connections in the toy industry provide the board of directors and Company with access to...

  • Page 100
    ... for corporate development for a number of years at Electronic Arts Inc., executing many acquisitions, investments and joint ventures, both domestically and internationally, in addition to his chief financial officer duties. His experience in the electronic game business, including both content...

  • Page 101
    ...marketing branded children's products, including 20 years' experience as chief executive officer of Tiger Electronics, Inc. His long service within the toy industry gives him extensive knowledge of and experience with business operations and strategy, including strategic planning, compensation plans...

  • Page 102
    .... The following table represents aggregate fees billed or to be billed to us for services performed for the fiscal years ended December 31, 2012 and 2011, by Ernst & Young, our independent registered public accounting firm. Fiscal Year (in thousands) 2012 2011 Audit Fees ...Audit-Related Fees Tax...

  • Page 103
    ... state tax returns. In addition, our 2011 fees included a study of our 2010 research and development credits. All Other Fees There were $16,200 in other fees paid to Ernst & Young in 2012, which corresponded to a review of the Company's response to an SEC comment letter and specific unrelated...

  • Page 104
    ... MANAGEMENT Beneficial Ownership of Our Common Stock The following table sets forth certain information regarding the ownership of LeapFrog's Class A common stock and Class B common stock (convertible into Class A common stock) as of March 31, 2013, by: (i) each director; (ii) each of the executive...

  • Page 105
    ...Capital Management Incorporated shares voting power over 1,725,880 shares and shares dispositive power over 4,305,590 shares. The address for Wells Fargo & Company is 420 Montgomery Street, San Francisco, CA 94104. (8) Based solely on information provided in a Schedule 13G filed on February 5, 2013...

  • Page 106
    ... LeapFrog's board of directors. (20) Includes 4,607 shares of Class A common stock issuable to Dr. Mitchell upon the exercise of options that are exercisable within 60 days after March 31, 2013. (21) Based solely on information provided in a Director Questionnaire, dated February 5, 2013, completed...

  • Page 107
    ... our annual meeting of stockholders, the total size of the board of directors will be automatically reduced to eight directors. The leadership structure of our board of directors currently consists of a non-management director serving as Chairman of the Board, our chief executive officer, a Vice...

  • Page 108
    .... In addition, the Company has regular internal management disclosure committee meetings, maintains a Code of Business Conduct and Ethics, product quality standards and processes and a variety of other policies and procedures designed to control and minimize risk. Management communicates routinely...

  • Page 109
    ... or leaders of LeapFrog, and how we plan to address them. In addition, such reviews include evaluating the effectiveness of our risk management processes and how to improve them if necessary. • The full board of directors engages in extensive discussions with our executive team on a regular basis...

  • Page 110
    ... experts or consultants, as it deems appropriate, to carry out its responsibilities. The following table provides membership and meeting information for each of the board committees in 2012: Nominating and Corporate Governance Member of our board of directors in 2012 Audit Compensation Thomas...

  • Page 111
    ... of the annual audit and the reviews of LeapFrog's quarterly financial statements. • • • • The audit committee is currently composed of three directors: Messrs. McKee (Chair), Maron and Wang. The audit committee met five times during our 2012 fiscal year. The board has determined...

  • Page 112
    ... 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, 2012 for filing with the Securities and Exchange Commission...

  • Page 113
    ... of corporate performance goals and objectives relevant to the compensation of our executive officers and other senior management, and the compensation and other terms of employment of our CEO. In addition, the compensation committee administers LeapFrog's equity incentive and stock purchase plans...

  • Page 114
    ... 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 the...

  • Page 115
    ..., reviewing the compensation paid to non-employee directors for their service on our board of directors and its committees, and developing a set of corporate governance principles. When searching for new board members, the nominating and corporate governance committee uses its network of contacts to...

  • Page 116
    ... access to the Company's management and employees. The guidelines also provide for an annual review of the chief executive officer's performance, as well as for the establishment of plans and policies for succession. The nominating and corporate governance committee assists the board in implementing...

  • Page 117
    ...,893 shares of our Class B common stock, which represented at such time approximately 42.72% of the combined voting power of our Class A common stock and Class B common stock, thus making him a ''related person'' under SEC rules. STOCKHOLDER COMMUNICATION WITH DIRECTORS LeapFrog's board of directors...

  • Page 118
    ... either LeapFrog's Non-Employee Director Stock Award Plan or the LeapFrog 2011 Equity and Incentive Plan. The stock options were granted at an exercise price of $10.40 per share. The awards vest on May 31, 2013, the last day of the month prior to the month of our 2013 annual meeting of stockholders...

  • Page 119
    ... awards to members of our board of directors would be made under the LeapFrog 2011 Equity and Incentive Plan, or 2011 Plan. The NEDSAP provided for an initial stock award upon being elected to our board of directors and annual stock awards on the first day of the month following the annual meeting...

  • Page 120
    ... 2011, our board of directors adopted a resolution that this same methodology would be used to grant equity awards to directors under the 2011 Plan upon suspension of the NEDSAP. The exercise price of stock options granted to directors is 100% of the fair market value of the Class A common stock...

  • Page 121
    ... Officer (until July 2012) Chief Marketing Officer President and Chief Operating Officer Senior Vice President and Managing Director, EMEA Our philosophy is to provide total compensation to our executives, including our named executive officers, that reasonably, equitably and responsibly meets...

  • Page 122
    ... executive benefit programs. In addition, Compensia reviewed and advised the compensation committee on compensation materials relating to executive compensation prepared by management for its consideration. As part of our annual executive compensation review process, Compensia, under the direction...

  • Page 123
    committee uses to determine the competitiveness of our executive and director compensation programs. To be included in the direct peer group, a company should be in the software, educational or leisure products industries, have net revenue in the range of $200 - 800 million and have a market ...

  • Page 124
    ...named executive officers in 2012. Consistent with the recommendation of the stockholders, the board of directors currently plans on holding its next say-on-pay vote at our 2014 annual meeting of stockholders. At our 2011 annual meeting of stockholders, our stockholders had the opportunity to provide...

  • Page 125
    ... of responsibilities and experience and competitive market practices for base salary. There were no base salary changes for our named executive officers in 2012. Performance-Based and Other Bonuses We use performance-based cash bonuses to drive achievement of key business results and to recognize...

  • Page 126
    ...; (ii) successful execution of specific projects relevant to each executive's department and (iii) successful execution of employee-related goals. The compensation committee conducted an evaluation of the individual performance of each named executive officer with input from our CEO and assigned...

  • Page 127
    ... our 2012 operating plan and data regarding our financial results and business expectations as of that time, including toy industry sales growth projections and Company resources and capabilities. In addition, these levels were consistent with the relative risk acceptable to the board of directors...

  • Page 128
    ... market data, including bonus size as a percentage of base salary in companies in both our direct peer group and our industry reference group. The following table indicates the total performance-based bonus awards, discretionary bonus awards and guaranteed bonuses for our named executive officers...

  • Page 129
    ... corporate performance and the creation of stockholder value. Option grants made to our executives have an exercise price equal to 100% of the fair market value on the date of grant of the underlying Class A common stock, as defined under our 2011 Plan. Restricted Stock Units (RSUs). RSUs represent...

  • Page 130
    ...be equal to the closing market price of our Class A common stock on the date of grant. Our policy is that we will not time or select the grant dates for any stock options or other stock awards in coordination with our release of material non-public information. In addition, we have specific written...

  • Page 131
    ... employee stock purchase plan, on the same general conditions as are made available to all our full-time employees. We do not offer our U.S. executives, or other U.S. employees, guaranteed retirement or pension benefits. However, in the absence of Section 401(k) plans in the United Kingdom, or UK...

  • Page 132
    ... most highly-compensated executive officers (other than its chief financial officer). This limitation applies only to compensation that is not considered to be ''performance-based.'' Our 2011 Plan includes various provisions designed to allow us to grant stock options and other equity awards that...

  • Page 133
    ...''filed'' with the SEC, and is not to be incorporated by reference into any filing of LeapFrog under the Securities Act or the Exchange Act, other than LeapFrog's Annual Report on Form 10-K, where it shall be deemed to be ''furnished,'' whether made before or after the date hereof and irrespective...

  • Page 134
    ... of the option awards are discussed in Note 13, ''Stock-Based Compensation,'' of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. Mr. Barbour was appointed as our Chief Executive Officer in March 2011. The amount...

  • Page 135
    ... to his Section 401(k) savings plan account. Mr. Spalding was not a named executive officer in 2010 or 2011. Mr. Spalding is an employee of LeapFrog Toys (UK) Limited and is paid in UK pounds sterling. The amount reported assumes a conversion rate of 1.5539. The amount reported consists of pension...

  • Page 136
    ... each Named Executive Officer for the 2012 fiscal year are reported in the Summary Compensation Table. (2) As provided in the 2011 Plan, we grant options to purchase shares of our Class A common stock at an exercise price equal to the closing market price of our Class A common stock on the date of...

  • Page 137
    ...named executive officers. John Barbour Mr. Barbour joined the Company as our Chief Executive Officer in March 2011. He has an employment agreement with the Company which was negotiated and approved by our board of directors at that time. Mr. Barbour's employment agreement provides for an annual base...

  • Page 138
    ... options and stock awards reported in the table were granted under our 2002 Equity Incentive Plan (Prior Plan) or under our 2011 Plan as footnoted below. (2) Calculated by multiplying the closing market price of our Class A common stock as reported by the NYSE for December 31, 2012, $8.63 per share...

  • Page 139
    ... that vest at the rate of 50% of the shares subject to the award on January 1, 2012, and in 12 equal monthly installments thereafter. (15) Represents grant of option pursuant to our option exchange program in exchange for cancellation of an option to purchase 25,000 shares originally issued April 18...

  • Page 140
    ... option pursuant to our option exchange program in exchange for cancellation of an option to purchase 30,000 shares originally issued September 17, 2007, under the Prior Plan. Option is fully vested and exercisable. (21) Represents grant of option pursuant to our option exchange program in exchange...

  • Page 141
    ... table presents, for the fiscal year ended December 31, 2012, certain information regarding stock option exercises and the vesting of stock awards during the last fiscal year with respect to our named executive officers. Option Exercises and Stock Vested Option Awards Number of Shares Acquired...

  • Page 142
    ...2011, by the number of shares acquired on vesting. (12) Calculated by multiplying the closing market price as reported on the NYSE of our Class A common stock on the last trading day prior to the weekend vesting date of the stock award, or $5.55 per share on January 13, 2012, by the number of shares...

  • Page 143
    ... share by the number of shares exercised. (31) Calculated by multiplying the closing market price as reported on the NYSE of our Class A common stock on the date the stock award vested, or $10.06 per share on June 15, 2012, by the number of shares acquired on vesting. NO ADDITIONAL EXECUTIVE BENEFIT...

  • Page 144
    ...a change in control of the Company, the actual value of the amount realized, if any, from their stock options will depend upon the extent 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...

  • Page 145
    ... date of the change in control. In addition, if during the two-year period following a change in control of the Company, Mr. Barbour's employment were terminated without cause or by Mr. Barbour for good reason, we would be required to pay to Mr. Barbour the benefits described in the following table...

  • Page 146
    ... position in his functional area in the surviving top-most parent company and does not report directly to the chief executive officer, provided he remains in employment with the Company or its successor on a full-time basis for a period of six months. Under the Severance Plan, to resign for ''good...

  • Page 147
    ... and related proceedings; is disqualified or prohibited from being a director to any company by ...tables below assume that the event that triggered the payment occurred on December 31, 2012 and assume the appropriate standard in the named executive officer's plan, employment agreement or offer letter...

  • Page 148
    ...the additional vested options assuming a change in control of the Company occurred on December 31, 2012, and that such named executive officer's options were exercised on the same date, based on an exercise price of $8.63 per share, the closing market price of our Class A common stock as reported by...

  • Page 149
    ... in the Form 10-K. We make our Annual Report on Form 10-K, as well as our other SEC filings, available free of charge through the investor relations section of our website located at www.leapfroginvestor.com under ''Financial Information - SEC Filings'' as soon as reasonably practicable after they...

  • Page 150
    ... for consideration at the annual meeting. If any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment. By Order of the Board of Directors Robert L. Lattuga Vice...

  • Page 151
    ... beginning on December 31, 2007 through December 31, 2012 (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...

  • Page 152
    ... Retailing Group CORPORATE OFFICERS John Barbour Chief Executive Officer Michael J. Dodd President and Chief Operating Officer Raymond L. Arthur Chief Financial Officer Gregory B. Ahearn Chief Marketing Officer Brad R. Rodrigues Senior Vice President and General Manager of Digital and Community...

  • Page 153
    LeapFrog Enterprises, Inc. 6401 Hollis Street, Suite 100 Emeryville, CA 94608 510.420.5000 • leapfrog.com TM & © LeapFrog Enterprises, Inc. All rights reserved.