LeapFrog 2013 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... children learn best when they're having fun, and that each child learns differently. That's why every LeapFrog learning experience is created by experts and designed for fun. With solutions that are personalized to each child's level, we help children reach their potential through the joy of play...

  • Page 3
    ...children that provide engaging and personalized learning solutions filled with rich educational content. Every one of our platforms, toys and content are designed or approved by LeapFrog's full-time, in-house team of educational experts who are deeply involved in every game, toy, video, book and app...

  • Page 4
    ...best-selling content library with exciting new cartridges, books and apps. We are developing new content that can be accessed beyond our platforms, as well. Already this year, in partnership with Lionsgate, we created and launched the first of a series of Letter Factory Adventuresâ„¢ learning videos...

  • Page 5
    ... Preschool Electronic Learning Subclass, Units and Dollars, Annual 2-13. 3 Source: The LeapFrog Explorer Licensed Software Assortment secured the #2 position in The NPD Group/Retail Tracking Service's report of the top 1- best-selling toys of 2-13; Dollars, Annual 2-13. LeapFrog Annual Report 2013

  • Page 6
    ... â...ª No à š The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2013, calculated using the closing sale price as of that day, was approximately $392.4 million. Shares of common stock held by each executive officer and director of the registrant and...

  • Page 7
    ... as required by law. SPECIAL NOTE ON FISCAL PERIOD DATES This Annual Report on Form 10-K presents information regarding LeapFrog's performance during the fiscal year ended December 31, 2009, through the fiscal year ended December 31, 2013, as well as future financial obligations for the fiscal...

  • Page 8
    ...Officers and Corporate Governance...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence...Principal Accounting Fees and Services ...75 75 75 76 76 Market...

  • Page 9
    ... is responsible for the development, design, sale and marketing of multimedia learning platforms, related content and learning toys, which are sold primarily through retailers, distributors, and directly to consumers via the leapfrog.com online store and the App Center in the U.S. The App Center...

  • Page 10
    ... Our LeapFrog Learning Library consists of over 1,200 downloadable digital content titles available for sale via our App Center that are exclusively compatible with one or more of our LeapPad, Leapster or LeapReader products. Our library includes a wide variety of learning games, videos, music...

  • Page 11
    ...which customers can purchase and download digital content for their LeapPad, Leapster and LeapReader products, with a personal credit card, PayPal or with App Center cards purchased at retailers or on our online store. The App Center sells a wide variety of learning games, videos, music, ï¬,ashcards...

  • Page 12
    ... with a variety of electronic products including tablet computers, eBook readers and mobile devices. The LeapPad family of learning tablets and the Leapster platform also compete against handheld gaming platforms and against kid-targeted tablets that are sold in either the toy section or consumer...

  • Page 13
    ..., software development, content development, video games and toys. We have internally developed each of our current multimedia learning platforms using licensed technology, if warranted. For example, we use a version of Macromedia's Flash player in our LeapPad and Leapster multimedia learning...

  • Page 14
    .... Our online services are based on a combination of internally-developed content, in-licensed 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...

  • Page 15
    ... we face in relying on third-party technology licenses for our products. Seasonality Our business is highly seasonal with a significant portion of our revenue occurring in the second half of the year. Given relatively low sales volumes in the first half of the year and the fixed nature of many...

  • Page 16
    ... 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 17
    ... initiatives and large sales teams in the U.S., and was responsible for all facets of sales management, from leading major retail partner relationships to developing new channels of distribution and managing national distributor networks. Available Information We file Annual Reports on Form 10...

  • Page 18
    ...our sales and market share could decline. We currently compete in the learning toy and electronic learning-aids categories of the U.S. and international toy market, with makers of children's tablets and, to a lesser extent, with general purpose eBook readers, mobile devices and mobile game platforms...

  • Page 19
    ... and operating results could be materially affected. Our business is highly seasonal, and our annual operating results depend, in large part, on sales relating to the brief holiday season. Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing a substantial...

  • Page 20
    ... on 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 systems, could result in a loss of potential or existing customers and sales. Although our systems have...

  • Page 21
    ... third parties for content such as characters, stories, music, illustrations and trade names, and for technologies we incorporate in our products including key technology used in our LeapReader reading systems. In particular, we rely on our ability to acquire rights to popular entertainment media...

  • Page 22
    ... from markets outside the U.S. during fiscal years 2013, 2012 and 2011, respectively. Our business is, and will increasingly be, subject to additional risks associated with conducting business internationally, including the appeal of our products in international markets; difficulties managing and...

  • Page 23
    ... of our sales come from our web-connected multimedia learning platforms and related content. As we focus on web-connected products and direct marketing to consumers through the Internet, regulatory changes regarding the collection, use, disclosure, or security of personal information or other...

  • Page 24
    ..., or for suppliers to provide component parts. Our success is dependent on the efforts and dedication of our officers and other employees. The loss of services of members of our executive management team or other key employees could have an adverse effect on our business. We compete with many other...

  • Page 25
    ... 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 26
    ... prices per share of our Class A common stock on the NYSE in each quarter during the last two completed fiscal years. The values stated below are actual high and low sales prices, inclusive of intra-day trading. High Low 2013 First quarter . . Second quarter Third quarter . Fourth quarter 2012...

  • Page 27
    ... Taxes'' for additional information. * Weighted-average shares outstanding of Class A and Class B common stock 2013 2012 2011 (In millions) 2010 2009 Consolidated Balance Sheet Cash and cash equivalents . . Working capital** ...Total assets ...Total stockholders' equity . . Data: ... $168.1 312...

  • Page 28
    ...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 LeapReader reading and writing systems...

  • Page 29
    ... OF OPERATIONS SUMMARY OF CONSOLIDATED RESULTS FOR FISCAL YEARS ENDED DECEMBER 31, 2013, 2012 and 2011 2013 % Change 2012 2011 2013 vs. 2012 (Dollars in millions, except per share data) % Change 2012 vs. 2011 Net sales ...Cost of sales ...Gross margin* ...Operating expenses ...Operating expenses as...

  • Page 30
    ... 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 content distributed...

  • Page 31
    ... performance targets set as a part of our incentive compensation programs. Advertising Expenses Advertising expense consists of costs associated with marketing, advertising and promoting our products, including customer-related discounts and promotional allowances. 2013 2012 % Change 2011 2013 vs...

  • Page 32
    ... sales by two percentage points. The increase was in line with our strategy to drive continued demand for our multimedia learning family of products including content, accessories, and hardware, including the launch of LeapPad2. Depreciation and Amortization Expenses 2013 2012 % Change 2011 2013 vs...

  • Page 33
    ... prior years, high seasonal revenue concentrations, an unproven new product pipeline, and recent transition at the highest levels of our management team. During 2013, we evaluated our ability to realize the benefit of our domestic deferred tax assets and weighed all available positive and negative...

  • Page 34
    ... retail stores, distributors, resellers, and online channels including our online store and our App Center. Certain corporate-level operating expenses associated with sales and marketing, product support, human resources, legal, finance, information technology, corporate development, procurement...

  • Page 35
    ..., Mexico, South Africa and Spain, as well as through our App Centers and online stores directed to certain international jurisdictions. Certain corporate-level operating expenses associated with sales and marketing, product support, human resources, legal, finance, information technology, corporate...

  • Page 36
    ... content sales, as well as proportionally lower trade allowances and discounts. Net sales for 2012 included a 1% negative impact from changes in currency exchange rates. Cost of sales for 2012 increased 34% compared to 2011, primarily driven by higher sales volume, higher product costs associated...

  • Page 37
    ..., 2013. 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 for 2014, including those for capitalized content and website development costs, will be funded...

  • Page 38
    ...to timing and volume of purchases, higher inventory levels and higher incentive compensation payouts. Net cash used in investing activities for 2013 increased $9.6 million compared to 2012, primarily due to an increase in computer hardware and software purchases to upgrade our information technology...

  • Page 39
    ... of three to twelve years and contain provisions for renewal options of five years at market rates. We account for rent expense on a straight-line basis over the term of the lease. In addition, we are obligated to pay certain minimum royalties in connection with license agreements to which it...

  • Page 40
    ...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 are recognized as revenue. Costs incurred to ship...

  • Page 41
    ... third-party costs related to developing applications that are integral components of certain products we market, costs incurred to develop or acquire and customize code for web applications, costs to develop HTML web pages or develop templates, and costs to create initial graphics for the website...

  • Page 42
    ..., but are not limited to: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, LeapFrog-specific events and share price trends. Additional judgment is required to determine relative importance and impact of each factor. Application of the two...

  • Page 43
    ...of statutes of limitation in some of our foreign jurisdictions. Stock-based Compensation Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally four years) using...

  • Page 44
    ...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, 2013, 2012 and 2011 are summarized in the table below: 2013 Years...

  • Page 45
    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, 2013 Page Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm ...Report of Ernst & Young LLP, ...

  • Page 46
    ... 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 and whether effective internal control over financial reporting was...

  • Page 47
    Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the ...

  • Page 48
    ...'s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the...

  • Page 49
    LEAPFROG ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) 2013 December 31, 2012 ASSETS Current assets: Cash and cash equivalents ...Accounts receivable, net of allowances for doubtful $292, respectively ...Inventories ...Prepaid expenses and other current assets ...

  • Page 50
    LEAPFROG ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) 2013 Years Ended December 31, 2012 2011 Net sales ...Cost of sales ...Gross profit ...Operating expenses: Selling, general and administrative Research and development ...Advertising ......

  • Page 51
    LEAPFROG ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 31, 2013 2012 2011 Net income ...Other comprehensive income (loss), before tax: Currency translation adjustments ...Transfer of temporary gain on long-term investments ...Total other ...

  • Page 52
    ... 31, 2012 ...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 expense...

  • Page 53
    ...) Years Ended December 31, 2013 2012 2011 Operating activities: Net income ...Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...Deferred income taxes ...Stock-based compensation expense ...Loss on sale of long-term investments...

  • Page 54
    ... 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 LeapReader reading...

  • Page 55
    ... the card. For content purchased by the customer with a personal credit card directly through the Company's App Center, the Company recognizes revenue when the right to download content is granted. Amounts billed to customers for shipping and handling costs are recognized as revenue. Costs incurred...

  • Page 56
    ... increases to cost of sales. 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...

  • Page 57
    ... Company's direct costs of advertising, in-store displays and promotion programs are expensed as incurred. Under arrangements with certain of its customers, the Company reduces the net selling price of its products as an incentive (sales allowance) for the customers to independently promote LeapFrog...

  • Page 58
    ... through USD-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 hedging contracts...

  • Page 59
    ... the effective tax rate in the year of resolution. Stock-based Compensation 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 pursuant to the...

  • Page 60
    ... and Mexican Peso. The Company's outstanding foreign exchange forward contracts, all with maturities of approximately one month, had notional values of $37,182 and $53,577 at December 31, 2013 and 2012, respectively. The fair market values of these instruments, based on quoted prices, as of the same...

  • Page 61
    ... cost or market as of December 31, 2013 and 2012, were as follows: December 31, 2013 2012 Raw materials ...Finished goods ...Total ... $ 4,619 49,671 $54,290 $ 1,243 39,068 $40,311 During 2013, 2012 and 2011, the Company recorded net sales of inventory written down in the previous year resulting...

  • Page 62
    ... years ended December 31, 2013, 2012 and 2011, 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...

  • Page 63
    .... 9. Accrued Liabilities The Company's accrued liabilities as of December 31, 2013 and 2012 were as follows: December 31, 2013 2012 Employee-related expenses ...Advertising and promotion ...Royalties payable ...Manufacturing and warehousing ...Marketing, consulting and web-related Other ...Total...

  • Page 64
    LEAPFROG ENTERPRISES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) 10. Income Taxes The Company's income before taxes included the following components: 2013 Years Ended December 31, 2012 2011 United States ...Foreign ...Total ...The components of the ...

  • Page 65
    ... any associated tax liability would be fully offset by its domestic net operating loss or tax credit carryforwards for the foreseeable future. A recent change in the business strategy for distributing product into Mexico will ultimately result in the liquidation of the Company's Mexican subsidiary...

  • Page 66
    ... 2013 and will expire in years 2014 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 with a three-year period. Sales of the Company's common stock...

  • Page 67
    ... per share data) 10. Income Taxes âˆ' (continued) The changes in the balance of gross unrecognized tax benefits, during the years ended December 31, 2013, 2012 and 2011 were as follows: Years Ended December 31, 2013 2012 2011 Balance at beginning of year ...Gross increase âˆ' tax positions taken...

  • Page 68
    ...compensation, not to exceed the Internal Revenue Service (the ''IRS'') maximum contribution limit. The Company provides a matching opportunity of 100% of eligible contributions up to a maximum of $3.5 per year per employee, which vests over three years. For the years ended December 31, 2013 and 2012...

  • Page 69
    ...all future equity awards to members of the board of directors would be made under the Company's 2011 EIP. The Company currently has outstanding two types of stock-based compensation awards to its employees, directors and certain consultants: stock options and RSUs. Both stock options and RSUs can be...

  • Page 70
    ... 21.6% 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 2013, 2012 and 2011, as...

  • Page 71
    ... Offıcer. Stock Plan Activity Stock Options The activity in the Company's stock option plan for the years ended December 31, 2013, 2012 and 2011 was as follows: Average Remaining Contractual Life in Years Aggregate Intrinsic Value Number of Shares Weighted-Average Exercise Price Outstanding at...

  • Page 72
    .... The price of a share of the Company's Class A common stock was $7.94 and $8.63 as of December 31, 2013 and 2012, respectively. The total intrinsic value of options exercised in 2013, 2012 and 2011 was $6,162, $5,608 and $1,186, respectively. As of December 31, 2013, unrecognized compensation cost...

  • Page 73
    ... amounts per share on all shares of Class A and Class B common stock. 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 dividends in the foreseeable future. In the event of liquidation, Class...

  • Page 74
    ... of the Company's Class A common stock and Class B common stock as of that date. In the first quarter of 2013, and during the 2012 and 2011 fiscal years, the Company purchased software products and support services totaling $1,146, $2,912 and $2,680, respectively, from Oracle Corporation on terms...

  • Page 75
    ... In 2013 and 2012, WKK Technology Limited, located in China, supplied 60% and 40%, respectively, of LeapFrog's products. In 2011, LeapFrog's largest individual vendor, Wynnewood Corp. Ltd., located in China, supplied 35% of LeapFrog's products. The Company expects to continue to use a limited number...

  • Page 76
    ... 2013, 2012 and 2011, respectively. The Company leases its facilities under operating leases that expire at various dates through 2017. Generally, these have initial lease periods of three to twelve years and contain provisions for renewal options of five years at market rates. Rent expense related...

  • Page 77
    ... U.S. segment is responsible for the development, design, sale and marketing of multimedia learning platforms, related content and learning toys, which are sold primarily through retailers, distributors, and directly to consumers via the leapfrog.com online store and the LeapFrog App Center in the...

  • Page 78
    ... net sales of the Company's product portfolio by segment for the years ended December 31, 2013, 2012 and 2011: 2013 % Years Ended December 31, 2012 % (Dollars in millions) 2011 % SEGMENTS United States: Multimedia learning platforms Learning toys ...All other ...Total ...International: Multimedia...

  • Page 79
    ... per share data) 21. Selected Quarterly Financial Information - Unaudited Unaudited selected financial information by quarter for the years ended December 31, 2013 and 2012 is presented below: March 31 For 2013 Quarters Ended June 30 September 30 December 31(1) Full Year 2013 Net sales ...Gross...

  • Page 80
    ... Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, and effected by our board of directors, management...

  • Page 81
    ...-end. Modify the data entry process associated with customer-related discounts and promotional allowances to ensure classification of promotional programs is subject to independent review. Inherent Limitations on Effectiveness of Controls A control system, no matter how well conceived and operated...

  • Page 82
    During the fourth quarter of 2013, management made the following changes to its internal control over financial reporting to remediate the material weakness related to journal entries: • Management has removed the ability to create and post journal entries for certain finance personnel and ...

  • Page 83
    ... to all of our employees and directors, including our CEO, CFO, 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 Conduct and Ethics that...

  • Page 84
    ... 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, 2013: Number of securities remaining available for future issuance under equity compensation plans...

  • Page 85
    ...: The following are filed as a part of Item 8 of this Annual Report on Form 10-K: Page Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm ...Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated...

  • Page 86
    ... of the 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 14...

  • Page 87
    ... 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 88
    ..., Inc. and the other persons named therein Form of Indemnification Agreement entered into by LeapFrog Enterprises, Inc. with certain of its directors and executive officers Net Lease, dated November 14, 2000, between Hollis Street Investors, L.L.C. and LeapFrog Enterprises, Inc., as amended...

  • Page 89
    ... Executive Officers†Compensation Arrangements between LeapFrog Enterprises, Inc. and its Board of Directors††Employment Agreement, dated as of February 27, 2011, between LeapFrog Enterprises, Inc. and John Barbour Amendment No. 1 to Employment Agreement, dated as of May 21, 2013, between...

  • Page 90
    ...Amendment No. 5 to Technology License Agreement by and between LeapFrog Enterprises, Inc., Anoto AB and Anoto Group AB, dated July 27, 2006** 10-K 001-31396 10.25 3/11/2013 10-K 001-31396 10.26 3/11/2013 10-Q 001-31396 10.02 8/6/2012 10-Q 001-31396 10.03 8/6/2012 10-K 001-31396 10...

  • Page 91
    ... and Restated Loan and Security Agreement dated as of May 1, 2012 by and among LeapFrog Enterprises, Inc., certain financial institutions and Bank of America, N.A. List of Subsidiaries Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm Consent of Ernst & Young...

  • Page 92
    ... by Reference Exhibit Number Original Exhibit Number Filed Herewith Exhibit Description Form File No. Filing Date 101 The following materials from the registrant's Annual Report on Form 10-K for the year ended December 31, 2013, formatted in Extensible Business Reporting Language (XBRL...

  • Page 93
    ...Year Allowance for doubtful accounts receivable 2013 ...2012 ...2011 ...Allowance for promotional markdowns 2013 ...2012 ...2011 ...Allowance for cooperative 2013 ...2012 ...2011 ...advertising...and price changes 2013 ...2012 ...2011 ...Allowance for defective 2013 ...2012 ...2011 ...products ......

  • Page 94
    ..., summarize 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 14...

  • Page 95
    ...5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All...

  • Page 96
    ... The Company's Annual Report on Form 10-K for the year ended December 31, 2013, to which this Certification is attached as Exhibit 32.01 (the ''Annual Report''), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, as applicable; and The information contained...

  • Page 97
    ... by the audit committee of our board of directors of PricewaterhouseCoopers LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2014. 3. Approval, in a non-binding advisory vote, of the compensation of our named executive officers, as disclosed in the...

  • Page 98
    ... Board ...Corporate Governance ...Transactions With Related Persons ...Stockholder Communication with Directors ... DIRECTOR COMPENSATION ...Director Compensation for Fiscal Year 2013 ...Discussion of Director Compensation ...EXECUTIVE COMPENSATION ...Compensation Discussion and Analysis ...Report...

  • Page 99
    .../Video Game Industry Finance/Marketing/Education Leadership/Game and Toy Industries Finance/Retail/Consumer Products No Yes Yes Yes Yes Yes Yes Yes 0 1 1 0 1 0 0 1 HIGHLIGHTS FROM THE COMPENSATION DISCUSSION & ANALYSIS Financial Results • Although net sales in 2013 declined 5% compared to 2012...

  • Page 100
    ... the total direct compensation opportunity for our chief executive officers is performance-based. • Our compensation committee and board of directors maintain specific corporate governance and compensation practices to ensure consistency with the Company's short-term and long-term goals. Say-on...

  • Page 101
    ... giving specific voting instructions, your shares will be voted as recommended by the board of directors: For each director nominee, for ratification of the appointment of the independent registered public accounting firm and for the advisory vote to approve named executive officer compensation...

  • Page 102
    ...be found at www.leapfrog.com under ''Company Info - Contact Us.'' If you attend the Annual Meeting, you will be asked to present photo identification, such as a driver's license. If you are a holder of record, the top half of your proxy card or your Notice of Internet Availability is your admission...

  • Page 103
    ... this service or if you would prefer to receive a separate Notice of Internet Availability of Proxy Materials or other proxy materials, you may: (1) notify your broker; (2) direct your written request to our Director of Investor Relations, 6401 Hollis Street, Suite 100, Emeryville, California 94608...

  • Page 104
    ... from the views of other members. John Barbour has served as our Chief Executive Officer and as a member of our board of directors since March 2011. Prior to joining LeapFrog, he served as President of the GameHouse division of RealNetworks, Inc., a digital media company, from October 2008 to August...

  • Page 105
    ... and as Chief Financial Officer from November 2004 to February 2010. Since August 2013, Mr. Chiasson has served on the board of directors of Fossil Group, a publicly-held company that designs, develops, markets and distributes fashion-related consumer products, and as a member of its audit committee...

  • Page 106
    ..., a startup dedicated to the online teaching of English and other subjects to children in Asia. He has also served as a member of the board of directors and on the audit committee of Cambium Learning Group, Inc., a publicly-held company that provides research-based learning solutions for at-risk and...

  • Page 107
    ... game business, including both content development and retail distribution oversight, has direct applicability to LeapFrog's business. His work at Electronic Arts and his service on the boards of directors of several companies give him broad-based knowledge in corporate governance, compensation...

  • Page 108
    ...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 109
    ... receiving the highest number of ''FOR'' votes shall be elected as directors. Under the rules of the NYSE, brokers are prohibited from giving proxies to vote on elections of directors unless the beneficial owner of such shares has given voting instructions on the matter. This means that if your...

  • Page 110
    ... on September 17, 2013, the audit committee dismissed Ernst & Young as the Company's independent registered public accounting firm effective as of that date. The reports of Ernst & Young on the Company's financial statements for the fiscal years ended December 31, 2012 and 2011 did not contain an...

  • Page 111
    ... perform audit services for us, including responsibilities of PwC and management in the conduct of the audit and estimated fees. The following table sets forth the fees accrued or paid to the Company's independent registered public accounting firms for the years ended December 31, 2013 and 2012...

  • Page 112
    ... committee has reviewed and discussed with LeapFrog's management the company's audited consolidated financial statements for the fiscal year ended December 31, 2013. The audit committee has also discussed with PricewaterhouseCoopers LLP, the company's independent registered public accounting firm...

  • Page 113
    ... of our executive officers' total compensation is based on the achievement of overall Company performance targets, as well as short-term and long-term individual goals; (iv) Provides reasonable, equitable and responsible bonus opportunities that will maintain individual executive compensation at...

  • Page 114
    ...executive officers named in the Summary Compensation Table later in this proxy statement; (iii) all executive officers and directors of LeapFrog as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of our Class A or Class B common stock. Information...

  • Page 115
    ... Fund, an investment company registered under the Investment Company Act of 1940 and managed by Royce & Associates, LLC, amounted to 5,108,871 shares or 7.85% of the total shares outstanding. The address for Royce & Associates, LLC is 745 Fifth Avenue, New York, NY 10151. Based solely on information...

  • Page 116
    ... common stock outstanding of LeapFrog as a result of its serving as investment manager of Australian investment offerings. The address for The Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355. Includes 164,166 shares of Class A common stock issuable to Mr. Ahearn upon the exercise of options...

  • Page 117
    ...ling requirements applicable to our officers, directors and greater-than-ten percent beneficial owners were filed in a timely manner except for a late Form 4 filing on January 10, 2013, for John Barbour disclosing the vesting of a portion of a restricted stock unit award on January 7, 2013. 19

  • Page 118
    ... the Company's chief executive officer and chief financial officer, provides insight to the Company's strategic and operational plans and also enables him to effectively consult with senior management and members of the board of directors to facilitate regular, open and direct communication between...

  • Page 119
    ...of human resources and the director of internal audit. The Compliance Committee reports directly to the chair of the audit committee. In addition, the Company has regular internal management disclosure committee meetings, maintains a Code of Business Conduct and Ethics, product quality standards and...

  • Page 120
    ... 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 internal audit department and any internal audit consulting firm we retain reports directly to the audit committee of the board of directors...

  • Page 121
    ...; 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 our internal audit function; establishes procedures, as required under applicable law...

  • Page 122
    ... the overall compensation strategy and policies for LeapFrog. This role includes review and approval 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...

  • Page 123
    ... of the board of directors, assessing the performance of the board of directors, reviewing the compensation paid to non-employee directors for their service on our board of directors and its committees, and developing our corporate governance principles. When searching for new board members, the...

  • Page 124
    ... board of directors have complete and open 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...

  • Page 125
    ...of inside information, in 2013, we amended the Insider Trading Policy so as to also prohibit any employees, executive officers or directors from, directly or indirectly, short selling or hedging any of the Company's equity securities, which includes the purchase of any financial instrument designed...

  • Page 126
    ... that date. In the first quarter of 2013, the Company purchased software products and support services totaling $1.1 million, from Oracle Corporation on terms the Company believes are comparable to those it would obtain in an arm's-length agreement. STOCKHOLDER COMMUNICATION WITH DIRECTORS LeapFrog...

  • Page 127
    ..., each of our non-employee directors elected at our 2013 annual meeting of stockholders was automatically granted an annual RSU award and stock option pursuant to the LeapFrog 2011 Equity and Incentive Plan. The stock options were granted at an exercise price of $10.19 per share. The awards vest on...

  • Page 128
    ... cases where a non-employee director served for a part of the year in a capacity entitling him to a retainer, the retainer was pro-rated to reï¬,ect his period of service in that capacity. In the fiscal year ended December 31, 2013, the total cash compensation paid to our non-employee directors was...

  • Page 129
    The term of stock options granted to non-employee directors is 10 years unless earlier terminated based on termination of continuous service or other conditions. In the event of a merger of LeapFrog with or into another corporation or a consolidation, acquisition of assets or other change-in-control...

  • Page 130
    ...For more information about our financial performance, please see our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 14, 2014. 2013 Executive Compensation Decisions The compensation committee of our board of directors made...

  • Page 131
    ...-term and long-term goals given the dynamic nature of our business and the market in which we compete for executive talent. Working together with the full board of directors and our nominating and corporate governance committee, we maintain the following key compensation-related governance practices...

  • Page 132
    ... our executive officers' total compensation is based on the achievement of overall Company performance targets, as well as short-term and long-term individual goals; Provides reasonable, equitable and responsible bonus opportunities that will maintain individual executive compensation at established...

  • Page 133
    ...a review of the competitiveness of our executive compensation program, including base salaries, annual bonus opportunities, equity awards, and other executive benefits, by analyzing the compensation practices of the companies in our compensation peer group (as described below), as well as data from...

  • Page 134
    ... their target total direct compensation to the market median. Compensation Design and Mix Each year, the compensation committee evaluates the total compensation of our executive officers with respect to our overall Company performance, individual performance, changes in scope of responsibility and...

  • Page 135
    ... was appropriate after reviewing the Peer Group for base salaries for individuals in comparable positions. There were no other base salary changes of our named executive officers in 2013. Performance-Based Bonuses We use performance-based cash bonuses to drive achievement of key business results and...

  • Page 136
    ... more closely track company performance against objectives. The following table shows how the formula is applied to determine the range of the potential performance-based bonus awards under the formula for each named executive officer for 2013. Base Salary Earned in 2013 Target Bonus Opportunity...

  • Page 137
    ... our 2013 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 our board of directors...

  • Page 138
    ... on our 2013 operating plan and data regarding our financial results and business expectations as of that time, including toy industry and technology company financial benchmarks for product margin, operating expenses and operating income as a percentage of net sales, and Company resources and...

  • Page 139
    ... of the Company performance objectives and, individually, the performance goals for each of the named executive officers. Our board of directors and compensation committee had discretion to vary the amount of the bonus awards paid under the 2011 Plan to our named executive officers, but such...

  • Page 140
    ...-term corporate performance and the creation of stockholder value. Option grants made to our executive officers have an exercise price equal to 100% of the fair market value of the underlying Class A common stock, as defined under our 2011 Plan, on the date of grant. Restricted Stock Units (RSUs...

  • Page 141
    ... In addition, the equity grants assure that a significant portion of the total target direct compensation opportunities for our named executive officers is equity-based and ''at risk'' based on corporate performance. The compensation committee believes that this practice aligns the interests of our...

  • Page 142
    ... number of shares subject to awards that may be granted to an individual under the plan in any one year. Generally, we intend to grant stock options to our executive officers in a manner that is designed to satisfy the requirements for ''performance-based'' compensation to avoid the deduction limit...

  • Page 143
    ... review and discussion, the compensation committee has recommended to the board of directors that the Compensation Discussion & Analysis be included in this proxy statement and incorporated by reference into our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Compensation...

  • Page 144
    ...John Barbour(3) Chief Executive Officer Year 2013 2012 2011 2013 2012 2013 Bonus ($)* - 230,000 470,689 - 456,914 - Raymond L. Arthur(9) Chief Financial Officer Kenneth A. Adams(13) Senior Vice President, Sales Gregory B. Ahearn(15) Chief Marketing Officer Michael J. Dodd Advisor to the CEO 2013...

  • Page 145
    ... a healthcare plan only available to director-level UK employees. The amounts reported are paid in UK pounds and assumes a conversion rate of 1.656178. (22) 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...

  • Page 146
    ... each Named Executive Officer for the 2013 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 147
    ...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 148
    ... agreement automatically terminates when Mr. Spalding attains the age of 65. In February 2014, Mr. Spalding announced his resignation as the Company's Senior Vice President and Managing Director, EMEA. He will remain with the company for a transition period ending no later than August 10, 2014. 50

  • Page 149
    ... Vested Vested 2) Name Number of Number of Number of Shares or Securities Securities Units of Underlying Underlying Option Stock That Unexercised Unexercised Exercise Option Have Not Price Expiration Options (#) Options (#) Vested ($) Exercisable Unexercisable Date (#) John Barbour ... - 584,375...

  • Page 150
    ... the option vesting on the one-year anniversary of the vesting commencement date, which was June 18, 2012, and in 36 equal monthly installments thereafter. Represents 40,000 RSUs issued under the 2011 Plan that vest at the rate of one-third of the shares subject to the award on December 31, 2013 and...

  • Page 151
    ...the remainder of the option shares vesting in equal monthly installments thereafter. (21) Option issued under the Prior Plan. Option vests over a four-year period, with 25% of the shares subject to the option vesting on the one-year anniversary of the vesting commencement date, which was November 16...

  • Page 152
    ... 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 $8.56 per share on March 7, 2013, by the number of shares acquired on vesting. (4) Calculated by multiplying the closing market price as reported on the NYSE...

  • Page 153
    ... 31, 2012, by the number of shares acquired on vesting. (18) Calculated by multiplying the sales price as reported by the broker at the time of exercise on the date the stock option was exercised, or $9.69 per share on August 30, 2013, by the number of shares exercised less the option exercise price...

  • Page 154
    ... sales price as reported by the broker at the time of exercise on the date the stock option was exercised, or $8.56 per share on September 4, 2013, by the number of shares exercised less the option exercise price, calculated by multiplying the option exercise price of $2.75 per share by the number...

  • Page 155
    ...• Under the terms of Mr. Barbour's employment agreement, ''good reason'' means a material diminution in his authority, duties or responsibilities; the requirement that Mr. Barbour report to an officer or other employee of the Company rather than the board of directors; a material reduction in Mr...

  • Page 156
    ... and Arthur, ''good reason'' means a material diminution in authority, duties or responsibilities; a reduction in base salary or target bonus greater than 10%; a change in the geographic location of his workplace by more than 50 miles; or a material breach by the Company of the terms under which he...

  • Page 157
    ...Mr. Dodd's employment agreement, ''cause'' means misconduct or negligence in the performance of his duties to the Company; failure to perform his duties to the Company or to follow the lawful directives of the board of directors or any executive to which he reports which failure remains uncured for...

  • Page 158
    ...; or is guilty of conduct which brings LeapFrog UK or affiliated companies into disrepute. In February 2014, Mr. Spalding announced his resignation as the Company's Senior Vice President and Managing Director, EMEA. He will remain with the Company for a transition period ending no later than...

  • Page 159
    ...the Company occurred on December 31, 2013, and that such named executive officer's options were exercised on the same date, based on an exercise price of $7.94 per share, the closing market price of our Class A common stock as reported by the NYSE for December 31, 2013. (3) Assumes a conversion rate...

  • Page 160
    ... more of our named executive officers. We also do not maintain any executive retirement programs such as executive pension plans or supplemental executive retirement plans or other nonqualified deferred compensation plans. * * * By Order of the Board of Directors Robert L. Lattuga Senior Vice...

  • Page 161
    ..., 2008 through December 31, 2013 (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 predictions as to future...

  • Page 162
    ... Tiger Electronics, Inc. Caden Wang Retired EVP and Chief Financial Officer LVMH Selective Retailing Group CORPORATE OFFICERS John Barbour Chief Executive Officer Raymond L. Arthur Chief Financial Officer Gregory B. Ahearn Chief Marketing Officer Kenneth A. Adams Senior Vice President of Sales...

  • Page 163
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