Form 10-Q LEAPFROG ENTERPRISES For: Sep 30

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November 10, 2014 3:28 PM EST

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�

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

�

FORM 10-Q

��

�

�(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

�

For the quarterly period ended September 30, 2014

�

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

�

For the transition period from��to��

�

Commission File Number: 001-31396

�

LeapFrog Enterprises, Inc.

(Exact name of registrant as specified in its charter)

�

DELAWARE

�

95-4652013

(State or other jurisdiction of

incorporation or organization)

�

(I.R.S. Employer

Identification No.)

�

6401 Hollis Street, Suite 100, Emeryville, California	�	94608-1463
(Address of principal executive offices)	�	(Zip Code)

�

�510-420-5000

(Registrant’s telephone number, including area code)

�

Indicate by check mark whether the registrant (1)�has filed all reports required to be filed by Section�13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)�has been subject to such filing requirements for the past 90 days.��Yes x��No� �

�

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).��Yes x��No� �

�

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

�

Large�accelerated�filer	�	�	Accelerated�filer	x
Non-accelerated filer	��(Do not check if a smaller reporting company)	�	Smaller�reporting�company	�

�

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes��No�x

�

As of October 31, 2014, 65,766,486 shares of Class�A common stock, par value $0.0001 per share, and 4,395,461 shares of Class�B common stock, par value $0.0001 per share, of the registrant were outstanding.

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

TABLE OF CONTENTS

�

�	Part I.	�
�	Financial Information	�
�	�	�
Item�1.	Financial Statements	3
�	�	�
�	Consolidated Balance Sheets at September 30, 2014 and 2013 and March 31, 2014 (Unaudited)	3
�	�	�
�	Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2014 and 2013 (Unaudited)	4
�	�	�
�	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2014 and 2013 (Unaudited)	5
�	�	�
�	Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2014 and 2013 (Unaudited)	6
�	�	�
�	Notes to the Consolidated Financial Statements (Unaudited)	7
�	�	�
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
�	�	�
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
�	�	�
Item 4.	Controls and Procedures	22
�	�	�
�	Part II.	�
�	Other Information	�
�	�	�
Item 1.	Legal Proceedings	24
�	�	�
Item�1A.	Risk Factors	24
�	�	�
Item 6.	Exhibits	25
�	�	�
Signatures	�	26

�

Table of Contents

��

PART I.

FINANCIAL INFORMATION

ITEM�1. FINANCIAL STATEMENTS

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

�

September 30,

�

March 31,

�

2014

�

2013

�

2014

�

ASSETS

�

Current assets:

�

Cash and cash equivalents

�

111,344

�

78,373

�

231,988

�

Accounts receivable, net of allowances for doubtful accounts of $402, $106 and $306, respectively

�

98,965

�

184,798

�

29,920

�

Inventories

�

108,197

�

121,738

�

52,293

�

Prepaid expenses and other current assets

�

12,380

�

8,727

�

10,416

�

Deferred income taxes

�

23,708

�

4,248

�

22,553

�

Total current assets

�

354,594

�

397,884

�

347,170

�

Deferred income taxes

�

63,232

�

2,422

�

53,998

�

Property and equipment, net

�

36,769

�

28,868

�

30,765

�

Capitalized content and website development costs, net

�

22,235

�

15,825

�

19,058

�

Goodwill

�

19,549

�

19,549

�

19,549

�

Other intangible assets, net

�

4,220

�

3,565

�

3,805

�

Other assets

�

1,365

�

1,161

�

1,473

�

Total assets

�

501,964

�

469,274

�

475,818

�

LIABILITIES AND STOCKHOLDERS' EQUITY

�

Current liabilities:

�

Accounts payable

�

56,967

�

59,086

�

19,146

�

Accrued liabilities

�

26,914

�

35,348

�

23,930

�

Deferred revenue

�

12,405

�

12,696

�

12,808

�

Income taxes payable

�

298

�

712

�

689

�

Total current liabilities

�

96,584

�

107,842

�

56,573

�

Other long-term liabilities

�

459

�

1,824

�

1,125

�

Total liabilities

�

97,043

�

109,666

�

57,698

�

Commitments and contingencies

�

Stockholders' equity:

�

Class A Common Stock, par value $0.0001; Authorized - 139,500 shares; Outstanding: 65,764, 64,524 and 65,229, respectively

�

Class B Common Stock, par value $0.0001; Authorized - 40,500 shares; Outstanding: 4,396, 4,396 and 4,396, respectively

�

Treasury stock

�

(185

)

�

(185

)

�

(185

)

Additional paid-in capital

�

428,546

�

415,618

�

422,678

�

Accumulated other comprehensive income (loss)

�

(1,251

)

�

124

�

(578

)

Accumulated deficit

�

(22,196

)

�

(55,956

)

�

(3,802

)

Total stockholders’ equity

�

404,921

�

359,608

�

418,120

�

Total liabilities and stockholders’ equity

�

501,964

�

469,274

�

475,818

�

See accompanying notes to consolidated financial statements

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

Net sales

�

113,645

�

200,985

�

160,622

�

283,971

�

Cost of sales

�

76,635

�

121,607

�

114,779

�

173,691

�

Gross profit

�

37,010

�

79,378

�

45,843

�

110,280

�

Operating expenses:

�

Selling, general and administrative

�

20,321

�

18,893

�

41,365

�

40,707

�

Research and development

�

7,363

�

7,543

�

14,974

�

16,237

�

Advertising

�

9,717

�

7,411

�

12,758

�

9,315

�

Depreciation and amortization

�

2,758

�

2,631

�

5,600

�

5,246

�

Total operating expenses

�

40,159

�

36,478

�

74,697

�

71,505

�

Income (loss) from operations

�

(3,149

)

�

42,900

�

(28,854

)

�

38,775

�

Other income (expense):

�

Interest income

�

Other, net

�

124

�

(230

)

�

(277

)

Total other income (expense), net

�

150

�

(169

)

�

(247

)

Income (loss) before income taxes

�

(2,999

)

�

42,940

�

(29,023

)

�

38,528

�

Provision for (benefit from) income taxes

�

(973

)

�

16,567

�

(10,629

)

�

15,445

�

Net income (loss)

�

(2,026

)

�

26,373

�

(18,394

)

�

23,083

�

Net income (loss) per share:

�

Class A and B - basic

�

(0.03

)

�

0.38

�

(0.26

)

�

0.34

�

Class A and B - diluted

�

(0.03

)

�

0.37

�

(0.26

)

�

0.33

�

Weighted-average shares used to calculate net income (loss) per share:

�

Class A and B – basic

�

70,052

�

68,552

�

69,906

�

68,381

�

Class A and B - diluted

�

70,052

�

71,051

�

69,906

�

70,825

�

See accompanying notes to consolidated financial statements

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

Net income (loss)

�

(2,026

)

�

26,373

�

(18,394

)

�

23,083

�

Other comprehensive income (loss)

�

Currency translation adjustments

�

(1,563

)

�

558

�

(673

)

�

(71

)

Comprehensive income (loss)

�

(3,589

)

�

26,931

�

(19,067

)

�

23,012

�

See accompanying notes to consolidated financial statements

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

�

�	�	Six Months Ended September 30,						�
�	�	2014		�	�	2013		�
Operating activities:	�	�	�	�	�	�	�	�
Net income (loss)	�	$	(18,394	)	�	$	23,083	�
Adjustments to reconcile net income (loss) to net cash used in operating activities:	�	�	�	�	�	�	�	�
Depreciation and amortization	�	�	13,233	�	�	�	10,251	�
Deferred income taxes	�	�	(10,840	)	�	�	13,741	�
Stock-based compensation expense	�	�	5,680	�	�	�	5,211	�
Allowance for doubtful accounts	�	�	518	�	�	�	(371	)
Other changes in operating assets and liabilities:	�	�	�	�	�	�	�	�
Accounts receivable, net	�	�	(70,590	)	�	�	(127,465	)
Inventories	�	�	(57,464	)	�	�	(76,711	)
Prepaid expenses and other current assets	�	�	(2,212	)	�	�	1,254	�
Other assets	�	�	103	�	�	�	69	�
Accounts payable	�	�	39,570	�	�	�	42,432	�
Accrued liabilities	�	�	2,104	�	�	�	10,117	�
Deferred revenue	�	�	(341	)	�	�	5,033	�
Other long-term liabilities	�	�	(650	)	�	�	(679	)
Income taxes payable	�	�	(387	)	�	�	222	�
Net cash used in operating activities	�	�	(99,670	)	�	�	(93,813	)
Investing activities:	�	�	�	�	�	�	�	�
Purchases of property and equipment and other intangible assets	�	�	(15,066	)	�	�	(13,114	)
Capitalization of content and website development costs	�	�	(8,164	)	�	�	(6,731	)
Net cash used in investing activities	�	�	(23,230	)	�	�	(19,845	)
Financing activities:	�	�	�	�	�	�	�	�
Proceeds from stock option exercises and employee stock purchase plan	�	�	1,479	�	�	�	2,863	�
Cash paid for payroll taxes on restricted stock unit releases	�	�	(841	)	�	�	(785	)
Common stock repurchased	�	�	(38	)	�	�	-	�
Excess tax benefits from stock-based compensation	�	�	11	�	�	�	11	�
Net cash provided by financing activities	�	�	611	�	�	�	2,089	�
Effect of exchange rate changes on cash	�	�	1,645	�	�	�	232	�
Net change in cash and cash equivalents	�	�	(120,644	)	�	�	(111,337	)
Cash and cash equivalents, beginning of period	�	�	231,988	�	�	�	189,710	�
Cash and cash equivalents, end of period	�	$	111,344	�	�	$	78,373	�
�	�	�	�	�	�	�	�	�
Non-cash investing and financing activities:	�	�	�	�	�	�	�	�
Net change in accounts payable and accrued liabilities related to capital expenditures	�	$	(404	)	�	$	(1,823	)

�

See accompanying notes to consolidated financial statements

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

�

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

�

Basis of Presentation

�

In the opinion of management, all normal, recurring adjustments considered necessary for a fair statement of the financial position and interim results of LeapFrog Enterprises, Inc. and its consolidated subsidiaries (collectively, the “Company” or “LeapFrog” unless the context indicates otherwise) as of and for the periods presented have been included. The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) applicable to interim financial information and with the instructions to Form�10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements include the accounts of LeapFrog and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

�

On May 13, 2014, the Company’s board of directors approved a change in the Company’s fiscal year-end from�December 31 to March 31�in order to better align the Company’s business planning and financial reporting functions with the seasonality of its business.

�

The financial information included herein should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2013 Annual Report on Form 10-K filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on March�14, 2014 for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”).

�

The accounting policies used by the Company in its presentation of interim financial results are consistent with those presented in Note 2 to the consolidated financial statements included in the Company’s 2013 Form 10-K.

�

Due to the seasonality of the Company’s business, the results of operations for interim periods are not necessarily indicative of the operating results for a full year.

�

Certain amounts in the financial statements for prior periods have been reclassified to conform to the current-year presentation. In addition, the Company has revised its consolidated balance sheets as of September 30, 2013 and March 31, 2014 to correct the classification of the capitalized development costs of its proprietary technologies included in certain key products from property and equipment, to other intangible assets. As compared to previously reported amounts, property and equipment, net, has been reduced and other intangible assets, net, have been increased by $3,365 and $3,805 for September 30, 2013 and March 31, 2014, respectively. Furthermore, the Company has revised its consolidated balance sheets as of September 30, 2013 and March 31, 2014 to present, on a net basis, its domestic non-current deferred tax liabilities and non-current deferred tax assets. As compared to previously reported amounts, deferred income taxes under non-current assets and non-current deferred income tax liabilities have been reduced by $3,759 and $3,812 for September 30, 2013 and March 31, 2014, respectively. These revisions represent errors that were not deemed material, individually or in aggregate, to the consolidated financial statements for the corresponding prior periods. These revisions do not impact the Company’s previously reported consolidated results of operations or statements of cash flows.

�

Accumulated other comprehensive income (loss) consists solely of currency translation adjustments.

�

Fair Values of Financial Instruments and Investments

�

Fair value is defined by authoritative guidance as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

�

Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets. As of September 30, 2014 and March 31, 2014, the Company’s Level 1 assets consisted of money market funds and certificates of deposit with original maturities of three months or less. As of September 30, 2013, the Company’s Level 1 assets consisted of money market funds. These assets were considered highly liquid and are stated at cost, which approximates market value.

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

�

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

�

Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument. Such inputs could be quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less-active markets), or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and prepayment rates.

�

As of September 30, 2014 and 2013, the Company’s Level 2 assets and liabilities consisted of outstanding foreign exchange forward contracts used to hedge its exposure to certain foreign currencies, including the British Pound, Canadian Dollar and Euro. The Company did not hold any Level 2 assets as of March 31, 2014. The Company’s outstanding foreign exchange forward contracts, all with maturities of approximately one month, had notional values of $60,622 and $70,665 at September 30, 2014 and 2013, respectively. The fair market values of these instruments, based on quoted prices, were $(83) and $(195), on a net basis at September 30, 2014 and 2013, respectively, and recorded in accrued liabilities.

�

Level 3 includes financial instruments for which fair value is derived from valuation techniques, including pricing models and discounted cash flow models, in which one or more significant inputs, including the Company’s own assumptions, are unobservable. The Company did not hold any Level 3 assets as of September 30, 2014, March 31, 2014 and September 30, 2013.

�

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of September 30, 2014,�March�31, 2014 and September 30, 2013:

�

Estimated Fair Value Measurements

�

Carrying Value

�

Quoted Prices in
Active Markets
(Level 1)

�

Significant
Other
Observable
Inputs
(Level 2)

�

Significant
Unobservable
Inputs
(Level 3)

�

September 30, 2014:

�

Financial Assets:

�

Money market funds and certificate of deposit

�

25,011

�

25,011

�

Financial Liabilities:

�

Forward currency contracts

�

(83

)

�

(83

)

�

March 31, 2014:

�

Financial Assets:

�

Money market funds and certificate of deposit

�

118,795

�

118,795

�

September 30, 2013:

�

Financial Assets:

�

Money market funds

�

58,761

�

58,761

�

Financial Liabilities:

�

Forward currency contracts

�

(195

)

�

(195

)

�

Inventories

�

The Company’s Inventories, stated on a first-in, first-out basis at the lower of cost or market as of September 30, 2014 and 2013, and March�31, 2014:

�

September 30,

�

March 31,

�

2014

�

2013

�

2014

�

Raw materials

�

5,242

�

5,364

�

4,594

�

Finished goods

�

102,955

�

116,374

�

47,699

�

Total

�

108,197

�

121,738

�

52,293

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

�

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

�

Other Intangible Assets and Goodwill

�

The Company’s other intangible assets were as follows as of September 30, 2014 and 2013, and March 31, 2014:

�

September 30,

�

March 31,

�

2014

�

2013

�

2014

�

Intellectual property, license agreements and other intangibles

�

21,555

�

20,120

�

20,560

�

Less: accumulated amortization

�

(17,335

)

�

(16,555

)

�

(16,755

)

Total

�

4,220

�

3,565

�

3,805

�

The Company’s goodwill was $19,549 as of September 30, 2014 and 2013, and March 31, 2014. All of its goodwill is allocated to the Company’s U.S. segment.

�

The Company performs goodwill impairment testing at least annually, unless indicators of impairment exist in interim periods. Indicators of impairment considered by the Company include, among others, overall financial operating results which depend in large part on the strength of the Company’s performance during the holiday season. As of September 30, 2014, based on its assessment of various qualitative factors and projection of future operating results, the Company does not believe that sufficient indicators of impairment of its goodwill currently exist that would require performing step one of the two-step test for goodwill impairment. To the extent the Company’s results during the holiday season are weaker than anticipated, the Company may be required to perform step one of the two-step test for goodwill impairment. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit as if the reporting unit was acquired in a business combination. Should the carrying value of its goodwill be found to exceed its estimated fair value, the Company would be required to record an impairment charge, which would decrease the carrying value of the assets and negatively impact the Company’s results of operations.

�

Income Taxes

�

The Company’s provision for (benefit from) income taxes and effective tax rates were as follows:

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

Provision for (benefit from) income taxes

�

(973

)

�

16,567

�

(10,629

)

�

15,445

�

Income (loss) before income taxes

�

(2,999

)

�

42,940

�

(29,023

)

�

38,528

�

Effective tax rate

�

32.4

�

38.6

�

36.6

�

40.1

�

The Company’s effective tax rate is affected by recurring items, such as tax benefit or expense relative to the amount of loss incurred or income earned in its domestic and foreign jurisdictions. The Company’s tax rate is also affected by discrete items, such as tax benefits attributable to the recognition of previously unrecognized tax benefits, that may occur in any given year but are not consistent from year to year.

�

The Company’s effective tax rates and income tax benefits for the three and six months ended September 30, 2014 were primarily attributable to its domestic operating losses during the periods. The Company’s effective tax rates and income tax provisions for the same periods in 2013 were primarily attributable to its domestic operating income during the period.

�

During the three and six months ended September 30, 2014, the Company recognized $450 of previously unrecognized tax benefits, including a release of $158 of accrued interest, due to the expiration of the statutes of limitations in one of its foreign jurisdictions. During the three and six months ended September 30, 2013, the Company did not recognize any previously unrecognized tax benefits, and the tax benefits for the periods did not include any release of accrued interest and penalties related to uncertain tax positions. As of September 30, 2014 and 2013, and March�31, 2014, the Company had $15,901, $14,833 and $16,280, respectively, of unrecognized income tax benefits. The Company believes it is reasonably possible that the total amount of unrecognized income tax benefits could decrease by up to $6,875, excluding potential interest and penalties, over the course of the next twelve months, due to expiring statutes of limitations, which would be recognized as a tax benefit and affect its effective tax rate. The Company also recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2014 and 2013, and March�31, 2014, the Company had approximately $36, $647 and $187, respectively, of accrued interest and penalties related to uncertain tax positions. The recognition of previously unrecognized tax benefits and the release of associated accrued interest reduced other non-current tax liabilities.

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

�

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

�

Current and non-current gross deferred tax assets were $23,708 and $67,044 at September 30, 2014, respectively, as compared to $4,248 and $6,181 at September 30, 2013, respectively. The increases were primarily due to the release of a significant portion of the deferred tax valuation allowances during the three months ended December 31, 2013.

�

The Company maintained a valuation allowance of $9,839, $70,385, and $9,885 as of September 30, 2014 and 2013, and March�31, 2014, respectively, against its deferred tax assets related to state and foreign net operating loss carryforwards, and capital loss carryforwards that generally have 10 to 20 years until expiration.� Based on the Company’s projection of future operating results as of September 30, 2014, the Company believes it is more-likely-than-not that it will not be able to realize the full benefit of these loss carryforwards before they are due to expire. The Company’s overall financial operating results depend in large part on the strength of its performance during the holiday season. To the extent the Company’s results during the holiday season are weaker than anticipated, the expectations of future taxable income may decline, and an additional valuation allowance may be required if there are not sufficient expected future earnings to realize the benefit of the Company’s deferred tax assets prior to expiration.�The tax effect of such a valuation allowance would negatively impact the Company’s effective tax rate. Conversely, should the Company’s results during the holiday season exceed anticipated results, the expectations of future taxable income may rise, and a reduction to the Company’s valuation allowance may occur. The tax benefit associated with such a reduction in valuation allowance would favorably impact the Company’s tax rate. The Company will continue to evaluate all evidence in future periods, to determine if a valuation allowance against its deferred tax assets is warranted. Any changes to the Company’s valuation allowance will affect its effective tax rate, but will not affect the amount of cash paid for income taxes in the foreseeable future.

�

As of September 30, 2014 and 2013, the Company had non-current deferred tax liabilities of $3,812 and $3,759, respectively, which are netted against non-current deferred tax assets on the consolidated balance sheet, and other non-current tax liabilities of $153 and $1,003, respectively, reported as long-term liabilities on the consolidated balance sheet.

�

Stock-Based Compensation

�

The Company currently has outstanding two types of stock-based compensation awards to its employees, directors and certain consultants: stock options and restricted stock units (“RSUs”). Both stock options and RSUs can be used to acquire shares of the Company’s Class�A common stock, are exercisable or convertible, as applicable, over a period not to exceed ten years, and are most commonly assigned four-year vesting periods. The Company also has an employee stock purchase plan (“ESPP”).

�

Stock plan activity

�

The table below summarizes award activity for the six months ended September 30, 2014:

�

Stock

�

Total

�

Options

�

RSUs

�

Awards

�

Outstanding at March 31, 2014

�

6,774

�

1,476

�

8,250

�

Grants

�

1,273

�

1,001

�

2,274

�

Stock option exercises/vesting RSUs

�

(288

)

�

(299

)

�

(587

)

Retired or forfeited

�

(580

)

�

(250

)

�

(830

)

Outstanding at September 30, 2014

�

7,179

�

1,928

�

9,107

�

Total shares available for future grant at September 30, 2014

�

5,660

�

As of September 30, 2014, the total shares available for future grant under the ESPP were 762.

�

Table of Contents

��

LEAPFROG ENTERPRISES, INC.

�

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

�

Impact of stock-based compensation

�

The following table summarizes stock-based compensation expense charged to selling, general and administrative (“SG&A”) and research and development (“R&D”) expenses for the three and six months ended September 30, 2014 and 2013:

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

SG&A:

�

Stock options

�

1,236

�

1,347

�

2,787

�

2,742

�

RSUs

�

784

�

849

�

1,978

�

1,617

�

ESPP

�

163

�

224

�

Total SG&A

�

2,090

�

2,293

�

4,928

�

4,583

�

R&D:

�

Stock options

�

214

�

215

�

428

�

411

�

RSUs

�

145

�

115

�

324

�

217

�

Total R&D

�

359

�

330

�

752

�

628

�

Total expense

�

2,449

�

2,623

�

5,680

�

5,211

�

Valuation of stock-based compensation

�

Stock-based compensation expense related to stock options is calculated based on the fair value of each award on the grant date. In general, the fair value for stock option grants with only a service condition is estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for the three and six months ended September 30, 2014 and 2013:

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

Expected term (years)

�

4.93

�

5.18

�

4.70

�

4.64

�

Volatility

�

59.7

�

69.9

�

59.9

�

72.1

Risk-free interest rate

�

1.60

�

1.51

�

1.56

�

0.85

Expected dividend yield

�

RSUs are payable in shares of the Company’s Class�A common stock. The fair value of these stock-based awards is equal to the closing market price of the Company’s common stock on the date of grant. The grant-date fair value is recognized on a straight-line basis in compensation expense over the vesting period of these stock-based awards, which is generally four years.

�

Stock-based compensation expense related to the ESPP is estimated using the Black-Scholes option pricing model with the following assumptions for the three and six months ended September 30, 2014 and 2013:

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

Expected term (years)

�

0.49

�

0.49 - 0.5

�

0.49

�

0.49 - 0.5

�

Volatility

�

34.8% - 42.0

�

36.0% - 57.5

�

34.8% - 42.0

�

36.0% - 57.5

Risk-free interest rate

�

0.05% - 0.08

�

0.05% - 0.12

�

0.05% - 0.08

�

0.05% - 0.12

Expected dividend yield

�

Share Repurchase Program

�

On February 10, 2014, the Company’s board of directors approved a stock repurchase program authorizing the Company to repurchase up to an aggregate of $30,000 of its Class A common stock through December 31, 2014. The Company intends, from time to time, as conditions warrant, to repurchase stock in the open market. Purchases may be increased, decreased or discontinued at any time without prior notice. The plan does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at management’s discretion. During the three months ended June 30, 2014, the Company repurchased approximately 6 shares of its common stock at an average price of $6.50, which were retired upon repurchase. The Company did not repurchase any of its common stock during the three months ended September 30, 2014.

�

Table of Contents

�

LEAPFROG ENTERPRISES, INC.

�

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

�

Net Income (Loss) Per Share

�

The following table sets forth the computation of basic and diluted net income (loss) per share for three and six months ended September 30, 2014 and 2013:

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

(Numerator)

�

Net income (loss)

�

(2,026

)

�

26,373

�

(18,394

)

�

23,083

�

(Denominator)

�

Weighted average shares outstanding during period:

�

Class A and B - basic

�

70,052

�

68,552

�

69,906

�

68,381

�

Common stock equivalents

�

2,499

�

2,444

�

Class A and B - diluted

�

70,052

�

71,051

�

69,906

�

70,825

�

Net income (loss) per share:

�

Class A and B - basic

�

(0.03

)

�

0.38

�

(0.26

)

�

0.34

�

Class A and B - diluted

�

(0.03

)

�

0.37

�

(0.26

)

�

0.33

�

Options to purchase shares of the Company’s common stock and RSUs excluded from the calculation of diluted net loss per share were 8,999 and 9,115 for the three and six months ended September 30, 2014, respectively, and 3,470 and 3,820 for the three and six months ended September 30, 2013, respectively, as the effect would have been antidilutive.

�

Segment Reporting

�

The Company’s business is organized, operated and assessed in two geographic segments: U.S. and International.

�

The Company attributes sales to non-U.S. countries on the basis of sales billed by each of its foreign subsidiaries to its customers. Additionally, the Company attributes sales to non-U.S. countries if the product is shipped from Asia or one of its leased warehouses in the U.S. to a distributor in a foreign country. The Company charges all of its indirect operating expenses and general corporate overhead to the U.S. segment and does not allocate any of these expenses to the International segment.

�

The primary business of the two operating segments is as follows:

�

The U.S. segment is responsible for the development, design, sales 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 (“App Center”) in the U.S. The App Center includes both content developed by the Company and content from third parties that the Company curates and distributes.

�

The International segment is responsible for the localization, sales and marketing of multimedia learning platforms, related content and learning toys, originally developed for the U.S. This segment markets and sells the Company’s products to national and regional mass-market and specialty retailers and other outlets through the Company’s offices outside of the U.S., through distributors in various international markets, and directly to consumers via online stores and the App Center.

�

Table of Contents

�

LEAPFROG ENTERPRISES, INC.

�

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

�

The table below shows certain information by segment for the three and six months ended September 30, 2014 and 2013:

�

Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

Net sales:

�

United States

�

77,558

�

146,831

�

108,266

�

205,189

�

International

�

36,087

�

54,154

�

52,356

�

78,782

�

Totals

�

113,645

�

200,985

�

160,622

�

283,971

�

Income (loss) from operations:

�

United States

�

(8,865

)

�

29,652

�

(34,155

)

�

20,225

�

International

�

5,716

�

13,248

�

5,301

�

18,550

�

Totals

�

(3,149

)

�

42,900

�

(28,854

)

�

38,775

�

For the three months ended September 30, 2014, only the U.S. accounted for more than 10% of the Company’s consolidated net sales. For the three months ended September 30, 2013 and the six months ended September 30, 2014 and 2013, the U.S. and the United Kingdom individually accounted for more than 10% of the Company’s consolidated net sales.

�

10.

Commitments and Contingencies

�

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents and other intellectual property rights, claims related to breach of contract, employment disputes and a variety of other matters. The Company records a liability when the Company believes that it is both probable that a loss will be incurred, and the amount can be reasonably estimated. In the opinion of management, based on current knowledge, it is not reasonably possible that any of the pending legal proceedings or claims will have a material adverse impact on the Company’s financial position, results of operations or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources and other factors. In addition, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a particular reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements of the same reporting period could be materially adversely affected.

�

As of September 30, 2014, the Company had no outstanding off-balance sheet arrangements.

�

Table of Contents

�

ITEM�2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

�

Forward-looking Statements

�

This Quarterly Report on Form 10-Q contains forward-looking statements about management’s expectations, including, without limitation, the anticipated failure to realize the full benefit of certain deferred tax assets, the indefinite reinvestment of the undistributed earnings of our foreign subsidiaries, our intention not to repatriate any foreign earnings to the U.S., expectations regarding the effect of our net operating loss or tax credit carryforwards on any tax liability associated with the repatriation of cash held by our foreign subsidiaries, the tax treatment of the repatriation of cash from our subsidiary in Mexico, the anticipated impact of our accumulated deficit, the funding, nature and amount of future capital expenditures, the future funding of our working capital needs, and the timing, seasonality and expectations of cash flows from operations. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “future,” “potential,” or the negative of these terms or other comparable terminology. Our actual results, levels of activity, performance, achievements or the timing of events may differ materially from those expressed or implied by such forward-looking statements. The risks that could cause our results to differ include, without limitation, our ability to correctly predict highly changeable consumer preferences and product trends, our ability to continue to develop new products and services and successfully manage frequent product introductions and transitions, our ability to compete effectively with competitors, deterioration of global economic conditions, our reliance on a small group of retailers for the majority of our gross sales, the effectiveness of our marketing and advertising efforts, the seasonality of our business, system failures in our online services or web store, our dependence on our suppliers for our components and raw materials, our reliance on a limited number of manufacturers, our ability to maintain sufficient inventory levels, our ability to maintain or acquire licenses, our ability to protect or enforce our intellectual property rights, defects in our products, the risks associated with international operations, costs or changes associated with compliance with laws and regulations, negative political developments, changes in trade relations, armed hostilities, terrorism, labor strikes, natural disasters, or public health issues, our dependence on our officers and other employees, the sufficiency of our liquidity, impacts from acquisitions, mergers, or dispositions, continued ownership by a few stockholders of a significant percentage of the voting power in the company, and the volatility of our stock price. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or the timing of any events. We make these statements as of the date of this Quarterly Report on Form 10-Q and undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report, except as required by law.

�

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LeapFrog Enterprises, Inc. and its consolidated subsidiaries (collectively, “LeapFrog,” “we,” “us” or “our”). This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes in Part I, Item�1 of this Quarterly Report on Form 10-Q.

�

Our Business

�

LeapFrog is a leading developer of educational entertainment for children. 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 LeapReader reading and writing systems, which facilitate a wide variety of learning experiences provided by our rich content libraries, available in cartridge, print and digital format. We have created hundreds of interactive content titles for our platforms, covering subjects such as phonics, reading, writing, mathematics, science, social studies, creativity and life skills. In addition, we have a broad line of stand-alone interactive learning toys. Many of our products connect to our proprietary online LeapFrog Learning Path, which provides personalized feedback on a child’s learning progress and offers product recommendations to enhance each child’s learning experience. Our products are available in four languages (English, Queen’s English, French and Spanish) and are sold globally through retailers, distributors and directly to consumers via the leapfrog.com online store and the LeapFrog App Center (“App Center”).

�

Due to the seasonality of our business, our results of operations for interim periods are not necessarily indicative of the operating results for a full year.

�

Table of Contents

�

Consolidated Results of Operations

�

Three Months Ended
September 30,

�

% Change
2014 vs.

�

Six Months Ended
September 30,

�

% Change
2014 vs.

�

2014

�

2013

�

2013

�

2014

�

2013

�

2013

�

(Dollars in millions, except per share data)

�

Net sales

�

113.6

�

201.0

�

(43

�

160.6

�

284.0

�

(43

Cost of sales

�

76.6

�

121.6

�

(37

�

114.8

�

173.7

�

(34

Gross margin *

�

32.6

�

39.5

�

(6.9

)**

�

28.5

�

38.8

�

(10.3

)**

Operating expenses

�

40.2

�

36.5

�

74.7

�

71.5

�

Operating expenses as a percent of net sales

�

Income (loss) from operations

�

(3.1

)

�

42.9

�

(107

�

(28.9

)

�

38.8

�

(174

Net income (loss) per share - basic

�

(0.03

)

�

0.38

�

(0.41

)***

�

(0.26

)

�

0.34

�

(0.60

)***

Net income (loss) per share - diluted

�

(0.03

)

�

0.37

�

(0.40

)***

�

(0.26

)

�

0.33

�

(0.59

)***

�

Gross profit as a percentage of net sales

Percentage point change

***

Dollar change

�

Net sales for both the three and six months ended September 30, 2014 decreased 43%, as compared to the same periods in 2013 as a result of higher than desired inventory levels at retail entering the fiscal year which reduced retailer replenishment orders, the planned later timing of new product launches compared to the prior year, retailers reducing inventory levels, softer consumer demand for our products, as well as the delay of a new product launch. The decrease for the six months ended September 30, 2014 was partially offset by the calendar shift of Easter. Net sales for the three and six months ended September 30, 2014 were not materially affected by foreign currency exchange rates.

�

Cost of sales for the three and six months ended September 30, 2014 decreased 37% and 34%, respectively, as compared to the same periods in 2013 primarily driven by lower net sales resulting in lower product costs.

�

Gross margin for the three and six months ended September 30, 2014 was 32.6% and 28.5%, respectively, a decrease of 6.9 and 10.3 percentage points, respectively, as compared to the same periods of 2013 primarily driven by significantly higher trade discounts as a percentage of net sales to support sell-through of higher than desired inventory levels at retail, lower sales volume which increased the impact of fixed logistics costs, higher content amortization costs, changes in product mix with proportionally higher sales of lower-margin toys partially offset by lower sales of lower-margin hardware, and higher inventory allowances.

�

Operating expenses for the three and six months ended September 30, 2014 increased 10% and 4%, respectively, as compared to the same periods of 2013 primarily driven by increases in headcount in the current quarter, higher spending on TV advertising and promotional product launch events and higher spending on in-store displays. Operating expenses for the three months ended September 30, 2014 were also impacted by a shift in timing of product showcase events to the September quarter in 2014 as compared to the June quarter in 2013. Operating expenses for the six months ended September 30, 2014 were also impacted by a one-time favorable settlement of a dispute with a supplier of our point-of-purchase displays during the prior year period. The increase in the six months ended September 30, 2014 was partially offset by a decrease in incentive compensation expense.

�

Income (loss) from operations for the three and six months ended September 30, 2014 worsened by 107% and 174%, respectively, as compared to the same periods in 2013 driven by the decrease in net sales, reduced gross margin and higher operating expenses.

�

Basic and diluted net income (loss) per share for the three months ended September 30, 2014 decreased by $0.41 and $0.40, respectively, as compared to the same period of 2013. Basic and diluted net income (loss) per share for the six months ended September 30, 2014 decreased $0.60 and $0.59, respectively, as compared to the same period of 2013.

�

Operating Expenses

�

Selling, General and Administrative Expenses

�

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related employee benefits,�including stock-based compensation expense and other headcount-related expenses associated with executive management, finance, information technology, supply chain, facilities, human resources, other administrative headcount, legal and other professional fees, indirect selling expenses, systems costs, rent, office equipment and�supplies.

�

Table of Contents

��

�

Three Months Ended
September 30,

�

% Change
2014 vs.

�

Six Months Ended
September 30,

�

% Change
2014 vs.

�

2014

�

2013

�

2013

�

2014

�

2013

�

2013

�

(Dollars in millions)

�

SG&A expenses

�

20.3

�

18.9

�

41.4

�

40.7

�

As a percent of net sales

�

��

�

Percentage point change

�

SG&A expenses for the three and six months ended September 30, 2014 increased 8% and 2%, respectively, as compared to the same periods in 2013. The increase was primarily driven by an increase in headcount in the current quarter, partially offset by lower incentive compensation expense.

�

Research and Development Expenses

�

Research and development (“R&D”) expenses consist primarily of salaries and employee benefits, including stock-based compensation expense and other headcount-related expenses, associated with content development, product development, product engineering, third-party development and programming, and localization costs to translate and adapt content for international markets. We capitalize external third-party costs and certain internal costs related to content development, which are subsequently amortized into cost of sales in the statements of operations.

��

�

Three Months Ended
September 30,

�

% Change
2014 vs.

�

Six Months Ended
September 30,

�

% Change
2014 vs.

�

2014

�

2013

�

2013

�

2014

�

2013

�

2013

�

(Dollars in millions)

�

R&D expenses

�

7.4

�

7.5

�

15.0

�

16.2

�

As a percent of net sales

�

Percentage point change

�

R&D expenses for the three and six months ended September 30, 2014 decreased 2% and 8%, respectively, as compared to the same periods in 2013 primarily driven by the timing of capitalization of web development costs and lower incentive compensation expense, partially offset by higher expenses due to an increase in headcount and higher content development costs to support our strategic initiatives.

�

Advertising Expense

�

Advertising expense consists of costs associated with marketing, advertising and promoting our products, including customer-related discounts and promotional allowances.

��

�

Three Months Ended
September 30,

�

% Change
2014 vs.

�

Six Months Ended
September 30,

�

% Change
2014 vs.

�

2014

�

2013

�

2013

�

2014

�

2013

�

2013

�

(Dollars in millions)

�

Advertising expenses

�

9.7

�

7.4

�

12.8

�

9.3

�

As a percent of net sales

�

Percentage point change

�

Advertising expenses for the three and six months ended September 30, 2014 increased 31% and 37%, respectively, as compared to the same periods in 2013 primarily due to higher spending on TV advertising and promotional product launch events and higher spending on in-store displays during the current year periods. Advertising expenses for the three months ended September 30, 2014 were also impacted by a shift in timing of our annual New York based product showcase event to the September quarter in 2014 as compared to the June quarter in 2013. Advertising expenses for the six months ended September 30, 2014 were also impacted by a favorable one-time settlement of a dispute with a supplier of our point-of-purchase displays during the prior year period.

�

Income Taxes

�

Our provision for (benefit from) income taxes and effective tax rates were as follows:

�

Table of Contents

��

�

Three Months Ended
September 30,

�

Six Months Ended
September 30,

�

2014

�

2013

�

2014

�

2013

�

(Dollars in millions)

�

Provision for (benefit from) income taxes

�

(1.0

)

�

16.6

�

(10.6

)

�

15.4

�

Income (loss) before income taxes

�

(3.0

)

�

42.9

�

(29.0

)

�

38.5

�

Effective tax rate

�

32.4

�

38.6

�

36.6

�

40.1

�

Our tax rate is affected by recurring items, such as tax benefit or expense relative to the amount of loss incurred or income earned in our domestic and foreign jurisdictions. Our tax rate is also affected by discrete items, such as tax benefits attributable to the recognition of previously unrecognized tax benefits, that may occur in any given year but are not consistent from year to year.

�

Our effective tax rates and income tax benefits for the three and six months ended September 30, 2014 were primarily attributable to our domestic operating losses during the period. In addition, we recognized $0.5 million of certain previously unrecognized tax benefits due to the expiration of statutes of limitations in one of our foreign jurisdictions during the three months ended September 30, 2014. Our effective tax rates and income tax provisions for the same periods in 2013 were primarily attributable to our domestic operating income during the periods, partially offset by tax provisions attributable to our foreign operations. During the three and six months ended September 30, 2013, we did not recognize any previously unrecognized tax benefits.

�

We exclude jurisdictions with tax assets for which no benefit can be recognized from the computation of our effective tax rate and tax provision. As of December 31, 2012, we determined, at the required more-likely-than-not level of certainty, that our subsidiary in Mexico will not generate sufficient taxable income to realize the benefits of its deferred tax assets and therefore a full valuation allowance was recorded. Accordingly, the tax benefits for the three and six months ended September 30, 2014 and 2013 excluded tax benefit of the operating losses of our subsidiary in Mexico.

�

We maintained a valuation allowance of $9.8 million as of September 30, 2014 against certain deferred tax assets related to state and foreign net operating loss carryforwards, and capital loss carryforwards that generally have 10 to 20 years until expiration. Based on our projection of future operating results as of September 30, 2014, we believe it is more-likely-than-not that we will not be able to realize the full benefit of these loss carryforwards before they are due to expire. Our overall financial operating results depend in large part on the strength of our performance during the holiday season. To the extent our results during the holiday season are weaker than anticipated, our expectations of future taxable income may decline, and an additional valuation allowance may be required if there are not sufficient expected future earnings to realize the benefit of our deferred tax assets prior to expiration.�The tax effect of such a valuation allowance would negatively impact our effective tax rate. Conversely, should our results during the holiday season exceed anticipated results, our expectations of future taxable income may rise, and a reduction to our valuation allowance may occur. The tax benefit associated with such a reduction in valuation allowance would favorably impact the Company’s tax rate. We will continue to evaluate all evidence in future periods, to determine if a valuation allowance against our deferred tax assets is warranted. Any changes to our valuation allowance will affect our effective tax rate, but will not affect the amount of cash paid for income taxes in the foreseeable future.

�

Results of Operations by Segment

�

We organize, operate and assess our business in two primary operating segments: U.S. and International. This presentation is consistent with how our chief operating decision maker reviews performance, allocates resources and manages the business.

�

United States Segment

�

The U.S. segment is responsible for the development, design, sales and marketing of multimedia learning platforms, related content and learning toys. The U.S. segment includes net sales and related expenses directly associated with selling our products to national and regional mass-market and specialty retailers, other 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 activities, R&D, legal settlements and other corporate costs are charged entirely to our U.S. segment.

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Table of Contents

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�

Three Months Ended
September 30,

�

% Change
2014 vs.

�

Six Months Ended
September 30,

�

% Change
2014 vs.

�

2014

�

2013

�

2013

�

2014

�

2013

�

2013

�

(Dollars in millions)

�

Net sales

�

77.6

�

146.8

�

(47

�

108.3

�

205.2

�

(47

Cost of sales

�

52.9

�

86.9

�

(39

�

79.0

�

123.8

�

(36

Gross margin *

�

31.8

�

40.8

�

(9.0

)**

�

27.0

�

39.7

�

(12.7

)**

Operating expenses

�

33.5

�

30.3

�

63.4

�

61.2

�

Operating expenses as a percent of net sales

�

Income (loss) from operations

�

(8.9

)

�

29.7

�

(130

�

(34.2

)

�

20.2

�

(269

�

Gross profit as a percentage of net sales

Percentage point change

�

Net sales for both the three and six months ended September 30, 2014 decreased 47%, as compared to the same periods in 2013, as a result of higher than desired inventory levels at retail entering the fiscal year which reduced retailer replenishment orders, the planned later timing of new product launches compared to the prior year, retailers reducing inventory levels, softer consumer demand for our products, as well as the delay of a new product launch. The decrease for the six months ended September 30, 2014 was partially offset by the calendar shift of Easter.

�

Cost of sales for the three and six months ended September 30, 2014 decreased 39% and 36%, respectively, as compared to the same periods in 2013 primarily driven by lower sales volume resulting in lower product costs.

�

Gross margin for the three and six months ended September 30, 2014 decreased 9.0 and 12.7 percentage points, respectively, as compared to the same periods of 2013 primarily driven by lower sales volume which increased the impact of fixed logistics costs, higher content amortization costs, higher inventory allowances, and changes in product mix with proportionally higher sales of lower-margin toys partially offset by lower sales of lower-margin hardware. Gross margin for the six months ended September 30, 2014 was also negatively impacted by significantly higher trade discounts as a percentage of net sales to support sell through of year-end inventory levels at retail.

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Operating expenses for the three and six months ended September 30, 2014 increased 11% and 4%, respectively, as compared to the same periods of 2013 primarily due to increases in headcount in the current quarter, and higher spending on TV advertising and promotional product launch events, a shift in timing of product showcase events to the September quarter in 2014 as compared to the June quarter in 2013, and higher spending on store displays . Operating expenses for the six months ended September 30, 2014 were also impacted by a favorable one-time settlement of a dispute with a supplier of our point-of-purchase displays during the prior year period. The increase for the six months ended September 30, 2014 was partially offset by a decrease in incentive compensation expense.

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Income (loss) from operations for the three and six months ended September 30, 2014 worsened by 130% and 269%, respectively, as compared to the same periods in 2013 driven by the decrease in net sales, reduced gross margin, and higher operating expenses.

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International Segment

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The International segment is responsible for the localization, sales and marketing of multimedia learning platforms, related content and learning toys, originally developed for the U.S. The International segment includes the net sales and related expenses directly associated with selling our products to national and regional mass-market and specialty retailers and other outlets through our offices in the United Kingdom, France and Canada and through distributors in markets such as Australia, 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 development, procurement activities, research and development, legal settlements and other corporate costs are allocated to our U.S. segment and not allocated to our International segment.

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Three Months Ended
September 30,

�

% Change
2014 vs.

�

Six Months Ended
September 30,

�

% Change
2014 vs.

�

2014

�

2013

�

2013

�

2014

�

2013

�

2013

�

(Dollars in millions)

�

Net sales

�

36.1

�

54.2

�

(33

�

52.4

�

78.8

�

(34

Cost of sales

�

23.7

�

34.7

�

(32

�

35.8

�

49.9

�

(28

Gross margin *

�

34.3

�

35.9

�

(1.6

)**

�

31.7

�

36.6

�

(4.9

)**

Operating expenses

�

6.7

�

6.2

�

11.3

�

10.3

�

Operating expenses as a percent of net sales

�

Income from operations

�

5.7

�

13.2

�

(57

�

5.3

�

18.6

�

(71

�

Gross profit as a percentage of net sales

Percentage point change

�

Net sales for the three and six months ended September 30, 2014 decreased 33% and 34%, respectively, as compared to the same periods in 2013 as a result of higher than desired inventory levels at retail entering the fiscal year which reduced retailer replenishment orders, the planned later timing of new product launches compared to the prior year, retailers reducing inventory levels, softer consumer demand for our products, as well as the delay of a new product launch. The decrease for the six months ended September 30, 2014 was partially offset by the calendar shift of Easter. Net sales for the three and six months ended September 30, 2014 were not materially affected by foreign currency exchange rates.

�

Cost of sales decreased 32% and 28%, respectively, for the three and six months ended September 30, 2014 as compared to the same periods in 2013 primarily driven by lower net sales resulting in lower product costs.

�

Gross margin for the three and six months ended September 30, 2014 decreased 1.6 and 4.9 percentage points, respectively, as compared to the same periods in 2013 primarily driven by significantly higher trade discounts as a percentage of net sales to support sell through of higher than desired inventory levels at retail, lower sales volume which increased the impact of fixed logistics costs, changes in product mix with proportionally higher sales of lower-margin toys partially offset by lower sales of lower-margin hardware, and higher content amortization costs, partially offset by lower inventory allowances. Gross margin for the six months ended September 30, 2014 was also negatively impacted by higher royalty costs due to proportionally higher sales of licensed content.

�

Operating expenses for the three and six months ended September 30, 2014 increased 7% and 10%, respectively, as compared to the same periods in 2013 primarily driven by higher R&D spending on localization of our products. The increase in the six months ended September 30, 2014 was partially offset by lower incentive compensation expense.

�

Income from operations for the three and six months ended September 30, 2014 decreased 57% and 71%, respectively, as compared to the same periods in 2013 due to the decreases in net sales, reduced gross margin and higher operating expenses.

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Liquidity and Capital Resources

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Financial Condition

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Cash and cash equivalents totaled $111.3 million and $78.4 million at September 30, 2014 and 2013, respectively. The increase was primarily due to the net cash provided by operating activities, partially offset by reduced operating results and higher capital expenditures during the year. In line with our investment policy, cash equivalents were comprised of high-grade short-term money market funds and certificates of deposit as of September 30, 2014.

�

Cash and cash equivalents held by our foreign subsidiaries totaled $17.9 million and $13.3 million as of September 30, 2014 and 2013, respectively. We consider the undistributed earnings of our foreign subsidiaries as of September 30, 2014 to be indefinitely reinvested, and accordingly, no U.S. income taxes have been provided thereon. We do not currently intend to repatriate any foreign earnings to the U.S. However, if we were to repatriate these amounts to the U.S., any associated tax liability would be fully offset by our domestic net operating loss or tax credit carry forwards for the foreseeable future.

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A recent change in business strategy for distributing product into Mexico will ultimately result in the liquidation of our subsidiary in Mexico as we outsource distribution to a third party. At the end of the liquidation process, we intend to repatriate any residual cash to the U.S. We believe this cash repatriation will be considered a return of capital and not a repatriation of earnings and therefore will not result in a U.S. tax liability. Accordingly we have not recorded a tax provision for such return of capital.

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We have an asset-based revolving credit facility (the “revolving credit facility”) with a potential borrowing availability of $75.0 million for the months of September through December and $50.0 million for the remaining months. The borrowing availability varies according to the levels of our accounts receivable and cash and investment securities deposited in secured accounts with the lenders. Borrowing availability under this revolving credit facility was $55.2 million as of September 30, 2014. There were no borrowings outstanding on our revolving credit facility at September 30, 2014.

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Our accumulated deficit of $22.2 million at September 30, 2014 and net cash used in operating activities during the current quarter are not expected to have an impact on our future ability to operate, given our anticipated cash flows from operations, strong cash position and the availability of our revolving credit facility.

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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 the fiscal year ending March 31, 2015, including those for capitalized content and website development costs, will be funded with cash flows generated by operations. Capital expenditures were $23.2 million for the six months ended September 30, 2014 and $19.8 million for the same period of 2013. We expect capital expenditures to be in the range of $35.0 million to $45.0 million for the fiscal year ending March 31, 2015, as we make significant investments to upgrade our internal business systems and invest in significant new product launches during the year. We expect capital expenditures to be lower than this level in future years.

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On February 10, 2014, our board of directors approved a stock repurchase program authorizing us to repurchase up to an aggregate of $30.0 million of our common stock through December 31, 2014. During the three months ended June 30, 2014, the number of shares we repurchased was insignificant. The repurchased shares were retired upon repurchase. During the three months ended September 30, 2014, we did not repurchase any of our common stock.

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We believe that cash on hand, cash flow from operations and amounts available under our revolving credit facility will provide adequate funds for our working capital needs and planned capital expenditures over the next twelve months. Our ability to fund our working capital needs and planned capital expenditures, as well as our ability to comply with all of the financial covenants of our revolving credit facility, depend on our future operating performance and cash flows.

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Cash Sources and Uses

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The table below shows our sources and uses of cash for the six months ended September 30, 2014 as compared to the same period in 2013:

�

Six Months Ended September 30,

�

% Change
2014 vs.

�

2014

�

2013

�

2013

�

(Dollars in millions)

�

Cash flows provided by (used in):

�

Operating activities

�

(99.7

)

�

(93.8

)

�

Investing activities

�

(23.2

)

�

(19.8

)

�

Financing activities

�

0.6

�

2.1

�

(71

Effect of exchange rate fluctuations on cash

�

1.6

�

0.2

�

609

Decrease in cash and cash equivalents

�

(120.6

)

�

(111.3

)

�

Cash flow used in operations for the six months ended September 30, 2014 increased $5.9 million as compared to the same period in 2013 primarily due to increased net loss related to operating activities and timing of payments, partially offset by lower inventory purchases.

�

Net cash used in investing activities for the six months ended September 30, 2014 increased $3.4 million as compared to the same period of 2013 primarily due to an increase in investments to upgrade our internal business systems and to develop more complex new products.

�

Net cash provided by financing activities for the six months ended September 30, 2014 decreased $1.5 million as compared to the same period of 2013 primarily due to a decrease in proceeds from stock option exercises and employee stock purchase plan.

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The effect of exchange rate fluctuations on cash increased by $1.4 million as compared to the same period of 2013 primarily due to the general strengthening of the U.S. dollar against a majority of the foreign currencies that we transact business in during current year period.

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Seasonal Patterns of Cash Provided By or Used in Operations

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Historically, through 2011, our cash flow from operations has generally been highest in the quarter ending in March of each year when we collect a majority of our accounts receivable booked in the quarter ending in December of the prior calendar year. In 2013 and 2012, an increase in earlier sales to retailers in the quarters ending in September and December, and credit card-based sales through our App Center in the quarter ending in December resulted in higher cash flow from operations in the quarter ending in December than in the quarter ending in March, which was a deviation from our historical norm. This pattern may not continue for the current fiscal year due to planned later launches of new products in the current year as compared to previous years. Cash flow used in operations tends to be highest in the quarter ending in September, as collections from prior accounts receivable taper off and we invest heavily in inventory in preparation for the holiday season. Historically, cash flow generally turns positive again in the quarter ending in December as we begin to collect on the accounts receivable associated with the holiday season. However, these seasonal patterns may vary depending upon general economic conditions and other factors.

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Contractual Obligations and Commitments

�

We have had no material changes outside the ordinary course of our business in our contractual obligations during the six months ended September 30, 2014. In addition, as of September 30, 2014, we had no outstanding off-balance sheet arrangements.

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Critical Accounting Policies

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In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. Actual results could differ significantly from those estimates under different assumptions and conditions. We included in our 2013 Form 10-K a discussion of our critical accounting policies that are particularly important to the portrayal of our financial position and results of operations and that require the use of our management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

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We have made no material changes to any of the critical accounting policies discussed in our 2013 Form 10-K through September 30, 2014.

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Recently Issued Accounting Guidance Not Yet Adopted

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In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. This guidance will be effective for annual period ending after December 15, 2016, i.e. our fiscal year ending March 31, 2017, and for annual and interim periods thereafter. Early adoption is permitted. We do not expect a material impact on our consolidated financial statements upon the adoption of this guidance.

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In May 2014, the FASB issued ASU 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). This guidance outlines a single comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.�The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. For public entities, this guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, i.e. the first quarter of our fiscal year 2018. Early application is not permitted. This guidance can be adopted either retrospectively to each prior reporting period presented, or retrospectively with a cumulative-effect adjustment recognized as of the date of adoption. We are currently evaluating the impact on our consolidated financial statements upon the adoption of this guidance.

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ITEM�3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Our market risk disclosures set forth in Item�7A of our 2013 Form 10-K have not changed materially for our quarter ended September 30, 2014.

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We develop products in the U.S. and market our products primarily in North America and, to a lesser extent, in Europe and the rest of the world. We are billed by and pay our third-party manufacturers in U.S. dollars. Sales to our international customers are transacted primarily in the country’s local currency. As a result, our financial results could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets.

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We manage our foreign currency transaction exposure by entering into short-term forward contracts. The purpose of this hedging program is to minimize the foreign currency exchange gain 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 three and six months ended September, 2014 and 2013 are summarized in the table below:

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Three Months Ended September 30,

�

Six Months Ended September 30,

�

2014

�

2013

�

2014

�

2013

�

(Dollars In thousands)

�

(Dollars In thousands)

�

Gain (loss) on foreign exchange forward contracts

�

1,679

�

(1,307

)

�

1,662

�

(1,269

)

Gain (loss) on underlying transactions denominated in foreign currency

�

(1,619

)

�

1,291

�

(1,828

)

�

1,069

�

Net gains (losses)

�

(16

)

�

(166

)

�

(200

)

�

Our foreign exchange forward contracts generally have original maturities of one month or less. A summary of all foreign exchange forward contracts outstanding as of September 30, 2014 is as follows:

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As of September 30, 2014

�

Average Forward
Exchange Rate

�

Notional Amount
in Local
Currency

�

Fair Value of
Instruments in
USD

�

(1)

�

(2)

Currencies:

�

British Pound (GBP/USD)

�

1.616

�

23,759

�

(47

)

Euro (Euro/USD)

�

1.258

�

10,197

�

(54

)

Canadian Dollar (USD/CAD)

�

1.119

�

10,515

�

Total fair value of instruments in USD

�

(83

)

�

(1)

In thousands of local currency

(2)

In thousands of USD

�

Cash equivalents are presented at fair value on our consolidated balance sheet. We invest our excess cash in accordance with our investment policy. As of September 30, 2014, our excess cash was invested in money market funds and certificates of deposit. As of September 30, 2013, our excess cash was invested in money market funds.

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ITEM�4. CONTROLS AND PROCEDURES

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Evaluation of Disclosure Controls and Procedures

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We have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. This evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”). Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (“SEC”) and 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 regarding required disclosure.

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Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of September 30, 2014, because of the material weakness in internal control over financial reporting described below.

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Completed or Planned Remediation Actions to Address Material Weakness

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As of December 31, 2013, we did not maintain effective controls over our process for establishing reserves for customer-related discounts and promotional allowances. Specifically, controls were not adequately designed to ensure the completeness and accuracy of data entered into the accounting system and used to determine customer-related discounts and promotional allowances. As a result, it was necessary for us to make a post-closing adjustment to increase our reserve for customer-related discounts and promotional allowances. Additionally, this control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.

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We have undertaken the remediation steps described below to address the material weakness discussed above:

�

Modified the period-end close processes to capture and analyze a complete list of customer-related discounts and promotional allowances for financial statement impact as of period-end; and

�

Modified the data review process associated with customer-related discounts and promotional allowances to ensure classification of promotional programs is subject to independent review.

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We will continue to monitor the remediation steps throughout the year and a final assessment will be performed as part of the evaluation of disclosure controls and procedures for the fiscal year ending March 31, 2015. We have undertaken a number of procedures and instituted controls to help ensure the proper collection, evaluation and disclosure of the information included in our financial statements. As a result, we believe that the consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects.

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Inherent Limitations on Effectiveness of Controls

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A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of 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 the objectives of our disclosure system are met. 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 degree of compliance with the policies or procedures may deteriorate.

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Changes in Internal Control over Financial Reporting

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As described above in the section “Completed or Planned Remediation Actions to Address Material Weakness”, there were changes in our internal control over financial reporting during the six months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

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PART II.

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OTHER INFORMATION

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ITEM�1. LEGAL PROCEEDINGS

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Refer to Note 10-“Commitments and Contingencies” in our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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ITEM�1A. RISK FACTORS

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There have been no material changes to the risk factors disclosed under Part I, Item�1A. “Risk Factors” in our 2013 Form 10-K, except for the new risk factor below:

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If we were required to record an impairment charge related to the value of our goodwill, or an additional valuation allowance against our deferred tax assets, our results of operations would be adversely affected.

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Our goodwill is tested for impairment at least annually or more frequently if indicators of impairment exist in interim periods. If impairment testing shows that the carrying value of our goodwill exceeds its estimated fair values, we would be required to record a non-cash impairment charge, which would decrease the carrying value of our goodwill and our results of operations would be adversely affected. Our deferred tax assets include net operating loss and tax credit carryforwards that can be used to offset taxable income and reduce income taxes payable in future periods.�Each quarter, we determine the probability of realizing the benefits of our deferred tax assets. If we determine that there is not sufficient anticipated future taxable income to realize the benefits of these assets, an additional valuation allowance would be required to reduce the value of our deferred tax assets. Such a reduction could result in a material non-cash expense in the period in which the valuation allowance is adjusted and our results of operations would be adversely affected.

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ITEM�6. EXHIBITS

�

Incorporated by Reference

�

Exhibit
Number

�

Exhibit Description

�

Form

�

File No.

�

Original
Exhibit
Number

�

Filing Date

�

Filed
Herewith

3.01

�

Amended and Restated Certificate of Incorporation

�

S-1/A

�

333-86898

�

3.03

�

7/22/2002

�

3.02

�

Amended and Restated Bylaws

�

8-K

�

001-31396

�

3.01

�

11/20/2012

�

4.01

�

Form of Specimen Class A Common Stock Certificate

�

10-Q

�

001-31396

�

4.01

�

11/3/2011

�

4.02

�

Fourth Amended and Restated Stockholders Agreement, dated as of May 30, 2003, by and among LeapFrog Enterprises, Inc. and the other persons named therein

�

10-Q

�

001-31396

�

4.02

�

8/12/2003

�

10.01

�

Ninth Amendment to Lease, dated December 9, 2013, by and between Hollis Street Investors II, L.L.C. and LeapFrog Enterprises, Inc.

�

10.02

�

Tenth Amendment to Lease, dated April 1, 2014, by and between Hollis Street Investors II, L.L.C. and LeapFrog Enterprises, Inc.

�

10.03

�

Eleventh Amendment to Lease, dated September 16, 2014, by and between Hollis Street Investors II, L.L.C. and LeapFrog Enterprises, Inc.

�

10.04

�

Employment Agreement, dated September 5, 2014, between Leapfrog Toys (UK) Limited and Antony Hicks

�

31.01

�

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

�

31.02

�

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

�

32.01

�

Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

�

101

�

The following materials from the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements

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SIGNATURES

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Pursuant to the requirements 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.

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LeapFrog Enterprises, Inc.	�
(Registrant)	�
�	�
/s/ John Barbour	�
John Barbour	�
Chief Executive Officer	�
(Principal Executive Officer)	�
�	�
Date: November 10, 2014	�
�	�
/s/ Raymond L. Arthur	�
Raymond L. Arthur	�
Chief Financial Officer	�
(Principal Financial Officer)	�
�	�
Date: November 10, 2014	�

�

Exhibit 10.01

�

NINTH AMENDMENT TO LEASE

�

THIS NINTH AMENDMENT TO LEASE (“Agreement”) dated this 9^th day of December, 2013 (the “Effective Date”), is made and entered into by and between HOLLIS STREET INVESTORS II, LLC, a Delaware limited liability company (“Landlord”) and LEAPFROG ENTERPRISES, INC., a Delaware corporation (“Tenant”).

�

BACKGROUND

�

A.��Landlord and Tenant entered into that certain Lease Agreement dated November 14, 2000, for approximately 40,060 rentable square feet of space (the “Premises”) located at 6401 Hollis Street, Suite 150, Emeryville, California, as more fully described in the Lease.

�

B.��The Lease has been amended by a First Amendment to Lease dated April 30, 2001.

�

C.��The Lease has been amended by a Second Amendment to Lease dated February 22, 2002, whereby the Premises were expanded by an additional 30,770 rentable square feet and Tenant’s Pro Rata Share was increased to Fifty-One and Sixty-Two Hundredths Percent (51.62%).

�

D.��The Lease has been amended by a Third Amendment to Lease dated March 27, 2003, whereby the Premises were expanded by an additional 31,980 rentable square feet and Tenant’s Pro Rata Share was increased to Seventy-Four and Ninety-Three Hundredths Percent (74.93%).

�

E.��The Lease has been amended by a Fourth Amendment to Lease dated March 27, 2003.

�

F.��The Lease has been amended by a Fifth Amendment to Lease dated March 7, 2005, whereby the Lease Term was extended until March 31, 2016.

�

G.��The Lease has been amended by a Sixth Amendment to Lease dated March 22, 2006, whereby the size of the Premises was increased by an additional 34,393 rental square feet known as Suite 125.

�

H.��The Lease has been amended by a Seventh Amendment to Lease dated December 6, 2010, whereby the Lease was terminated as to Suite 175 consisting of 30,770 rental square feet.

�

I.��The Lease has been amended by the Eighth Amendment to Lease dated June 2, 2011, whereby Landlord granted Tenant use of “Rooftop Equipment” (as defined therein).

�

J.��The Lease Agreement, as amended from time to time, is referred to as the “Lease”.

�

K.��The Premises currently contain 106,433 rentable square feet.

�

L.��The current term of the Lease expires on March 31, 2016.

�

M.��Tenant desires to lease Suite 160 in the building known as building B, located at 1480 64^th Street, Emeryville, California (“Building B”) on a temporary basis.

�

N.��Landlord and Tenant desire to amend the terms and conditions of the Lease as set forth in this Agreement.

�

O.��Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Lease.

�

AGREEMENT

�

NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereby mutually agree as follows:

�

1.��TEMPORARY PREMISES. From and after the Effective Date of this Agreement until January 31, 2015 (“Temporary Premises Term”), Tenant shall be allowed to occupy Suite 160 in Building B (the “Temporary Premises”). The Temporary Premises consist of approximately 3,129 rentable square feet. During the Temporary Premises Term, the term “Common Areas,” as defined in the Lease, shall include the common areas in Building B.

�

2.��TEMPORARY PREMISES BASE RENT. The Base Rent for the Temporary Premises shall be Two and 50/100 Dollars ($2.50) per rentable square foot per month, full service, for a total of Seven Thousand Eight Hundred Twenty-two and 50/100 Dollars ($7,822.50) per month, fully serviced, payable in advance on the first day of each month during the Temporary Premises Term.

�

3.��RENT CREDIT. Landlord shall provide Tenant with a rent credit in the amount of One Thousand Two Hundred Fifty and No/100 Dollars ($1,250.00) to be applied to the first month’s Base Rent.

�

4.��CONDITION OF TEMPORARY PREMISES. Tenant shall accept the Temporary Premises in its current ‘as is’ condition and acknowledges that Tenant is not relying on any representations or warranties by Landlord, its agents or any other persons regarding the Premises or Building B.

�

5.��AUTHORITY. Tenant represents and warrants that all necessary corporate actions have been duly taken to permit Tenant to enter into this Agreement and that the person signing this Agreement on behalf of Tenant has been duly authorized and instructed to execute this Agreement. Landlord represents and warrants that all necessary company actions have been duly taken to permit Landlord to enter into this Agreement and that the person signing this Agreement on behalf of Landlord has been duly authorized and instructed to sign this Agreement.

�

6.��BROKERS. Each of Landlord and Tenant warrants and represents that it has dealt with no real estate broker in connection with this Agreement and that no broker is entitled to any commission on account of this Agreement. The party who breaches this warranty shall defend, hold harmless and indemnify the other from any loss, cost, damage or expense, including reasonable attorneys’ fees, arising from the breach; Landlord’s indemnity of Tenant shall include claims by the Broker. Landlord is solely responsible for paying the commission of the Broker in accordance with a separate agreement.

�

7.��FULL FORCE AND EFFECT. Except as expressly modified above, all terms and conditions of the Lease remain in full force and effect and are hereby ratified and confirmed. Landlord and Tenant hereby acknowledge and agree that, except as provided in this Agreement, the Lease has not been modified, amended, canceled, terminated, released, superseded or otherwise rendered of no force or effect.

�

[Signatures follow on next page.]

�

Designated Address for Landlord:

�

Hollis Street Investors II LLC

c/o Bentall Kennedy (U.S.) Limited Partnership

Attn: Dir. of Asset Management

1215 Fourth Avenue, Suite 2400

Seattle, WA 98161

Facsimile: 206-682-4769

�

and to:

�

Hollis Street Investors II LLC

c/o Bentall Kennedy (U.S.) Limited Partnership

Attn: Dir. of Asset Management

7315 Wisconsin Ave., Ste. 350 West

Bethesda, MD 20814

Facsimile: 301-656-9339

�

and to:

�

MEPT Edgemoor REIT, LLC

c/o NewTower Trust Company

Attn: President/MEPT or Patrick O. Mayberry

3 Bethesda Metro Center, Suite 1600

Bethesda, MD 20814

Facsimile: 240-235-9961

�

LANDLORD:

�

Hollis Street Investors II LLC, a Delaware limited liability company

�

By: Hollis Street Investors, L.L.C, a Delaware limited liability company, its Sole Member

�

By: MEPT Hollis Street LLC, a Delaware limited liability company, its Manager

�

By: MEPT Edgemoor REIT LLC, a Delaware limited liability company, its Manager

�

By: Bentall Kennedy (U.S.) Limited Partnership, its Authorized Signatory

�

By: Bentall Kennedy (U.S.) G.P. LLC, its General Partner

�

By: /s/ Mark D. Reinikka��

Name: Mark D. Reinikka��

Its: Senior Vice President��

�

By: /s/ Scott Matthews��

Name: Scott M. Matthews��

Its: Senior Vice President ���

�

Designated Address for Tenant:

�

Leapfrog Enterprises, Inc.

Attn: Director of Real Estate and Facilities

6401 Hollis Street

Emeryville, CA 94608

�

With a copy to:

�

Leapfrog Enterprises, Inc.

Attn: General Counsel

6401 Hollis Street

Emeryville, CA 94608

�

TENANT:

�

Leapfrog Enterprises, Inc., a Delaware corporation

�

By:��/s/ Raymond L. Arthur��

Name: Raymond L. Arthur��

Its: ��CFO��

�

Exhibit 10.02

�

TENTH AMENDMENT TO LEASE

�

THIS TENTH AMENDMENT TO LEASE (“Agreement”) dated as of April 1, 2014 (the “Effective Date”), is made and entered into by and between HOLLIS STREET INVESTORS II, LLC, a Delaware limited liability company (“Landlord”) and LEAPFROG ENTERPRISES, INC., a Delaware corporation (“Tenant”).

�

BACKGROUND

�

B.��The Lease has been amended by a First Amendment to Lease dated April 30, 2001.

�

E.��The Lease has been amended by a Fourth Amendment to Lease dated March 27, 2003.

�

F.��The Lease has been amended by a Fifth Amendment to Lease dated March 7, 2005, whereby the Lease Term was extended until March 31, 2016.

�

G.��The Lease has been amended by a Sixth Amendment to Lease dated March 22, 2006, whereby the size of the Premises was increased by an additional 34,393 rental square feet known as Suite 125.

�

H.��The Lease has been amended by a Seventh Amendment to Lease dated December 6, 2010, whereby the Lease was terminated as to Suite 175 consisting of 30,770 rental square feet.

�

I.��The Lease has been amended by an Eighth Amendment to Lease dated June 2, 2011, whereby Landlord granted Tenant use of “Rooftop Equipment” (as defined therein).

�

J.��The Lease has been amended by a Ninth Amendment to Lease dated December 9, 2013, whereby Landlord leased Suite 160 in the building known as Building B, located at 1480 64^th Street, Emeryville, California (“Building B”) on a temporary basis.

�

K.��The Lease Agreement, as amended from time to time, is referred to as the “Lease”.

�

L.��The Premises, including Suite 160 in Building B, currently contain 109,562 rentable square feet.

�

M.��The current term of the Lease expires on March 31, 2016.

�

N.��Tenant desires to lease Suite 150 in the Building B on a temporary basis.

�

O.��Landlord and Tenant desire to amend the terms and conditions of the Lease as set forth in this Agreement.

�

P.��Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Lease.

�

AGREEMENT

�

NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereby mutually agree as follows:

�

1.��SUITE 150 PREMISES. From and after the Effective Date of this Agreement until January 31, 2015 (the “Suite 150 Term”), Tenant shall be allowed to occupy Suite 150 at 1480-64^th Street, Emeryville, California (“Suite 150”). Suite 150 consists of approximately 4,352 rentable square feet. During the Suite 150 Term, the term “Common Areas”, as defined in the Lease, shall include the common areas in Building B.

�

2.��SUITE 150 BASE RENT. The Base Rent for Suite 150 shall be Two and 50/100 Dollars ($2.50) per rentable square foot per month, full service, for a total of Ten Thousand Eight Hundred Eighty and No/100 Dollars ($10,880.00) per month, fully serviced, payable in advance on the first day of each month during the Suite 150 Term.

�

3.��CONDITION OF SUITE 150. Tenant shall accept Suite 150 in its current ‘as is’ condition and acknowledges that Tenant is not relying on any representations or warranties by Landlord, its agents or any other persons regarding Suite 150 or Building B.

�

4.��AUTHORITY. Tenant represents and warrants that all necessary corporate actions have been duly taken to permit Tenant to enter into this Agreement and that the person signing this Agreement on behalf of Tenant has been duly authorized and instructed to execute this Agreement. Landlord represents and warrants that all necessary company actions have been duly taken to permit Landlord to enter into this Agreement and that the person signing this Agreement on behalf of Landlord has been duly authorized and instructed to sign this Agreement.

�

5.��BROKERS. Each of Landlord and Tenant warrants and represents that it has dealt with no real estate broker in connection with this Agreement and that no broker is entitled to any commission on account of this Agreement. The party who breaches this warranty shall defend, hold harmless and indemnify the other from any loss, cost, damage or expense, including reasonable attorneys’ fees, arising from the breach; Landlord’s indemnity of tenant shall include claims by the Broker. Landlord is solely responsible for paying the commission of the Broker in accordance with a separate agreement.

�

6.��FULL FORCE AND EFFECT. Except as expressly modified above, all terms and conditions of the Lease remain in full force and effect and are hereby ratified and confirmed. Landlord and Tenant hereby acknowledge and agree that, except as provided in this Agreement, the Lease has not been modified, amended, canceled, terminated, released, superseded or otherwise rendered of no force or effect.

�

[Signatures follow on next page.]

�

Designated Address for Landlord:

�

Hollis Street Investors II LLC

c/o Bentall Kennedy (U.S.) Limited Partnership

Attn: Dir. of Asset Management

1215 Fourth Avenue, Suite 2400

Seattle, WA 98161

Facsimile: 206-682-4769

�

and to:

�

Hollis Street Investors II LLC

c/o Bentall Kennedy (U.S.) Limited Partnership

Attn: Dir. of Asset Management

7315 Wisconsin Ave., Ste. 350 West

Bethesda, MD 20814

Facsimile: 301-656-9339

�

and to:

�

MEPT Edgemoor REIT, LLC

c/o NewTower Trust Company

Attn: President/MEPT or Patrick O. Mayberry

3 Bethesda Metro Center, Suite 1600

Bethesda, MD 20814

Facsimile: 240-235-9961

�

LANDLORD:

�

Hollis Street Investors II LLC, a Delaware limited liability company

�

By: Hollis Street Investors, L.L.C, a Delaware limited liability company, its Sole Member

�

By: MEPT Hollis Street LLC, a Delaware limited liability company, its Manager

�

By: MEPT Edgemoor REIT LLC, a Delaware limited liability company, its Manager

�

By: Bentall Kennedy (U.S.) Limited Partnership, its Authorized Signatory

�

By: Bentall Kennedy (U.S.) G.P. LLC, its General Partner

�

By: /s/ Bruce Tuesley��

Name: Bruce Tuesley��

Its: Vice President��

�

By: /s/ Scott M. Matthews��

Name: Scott M. Matthews��

Its: Senior Vice President��

�

Designated Address for Tenant:

�

Leapfrog Enterprises, Inc.

Attn: Director of Real Estate and Facilities

6401 Hollis Street

Emeryville, CA 94608

�

With a copy to:

�

Leapfrog Enterprises, Inc.

Attn: General Counsel

6401 Hollis Street

Emeryville, CA 94608

�

TENANT:

�

Leapfrog Enterprises, Inc., a Delaware corporation

�

By: /s/ Raymond L. Arthur��

Name: Raymond L. Arthur��

Its: CFO��

�

Exhibit 10.03

�

ELEVENTH AMENDMENT TO LEASE

�

THIS ELEVENTH AMENDMENT TO LEASE (“Agreement”) dated this 16 day of September, 2014, is made and entered into by and between HOLLIS STREET INVESTORS II, L.L.C., a Delaware limited liability company (“Landlord”) and LEAPFROG ENTERPRISES, INC., a Delaware corporation (“Tenant”).

�

BACKGROUND

�

B.��The Lease has been amended by a First Amendment to Lease dated April 30, 2001.

�

E.��The Lease has been amended by a Fourth Amendment to Lease dated March 27, 2003.

�

F.��The Lease has been amended by a Fifth Amendment to Lease dated March 7, 2005, whereby the Lease Term was extended until March 31, 2016.

�

G.��The Lease has been amended by a Sixth Amendment to Lease dated March 22, 2006, whereby the size of the Premises was increased by an additional 34,393 rentable square feet known as Suite 125.

�

H.��The Lease has been amended by a Seventh Amendment to Lease dated December 6, 2010, whereby the Lease was terminated as to Suite 175 consisting of 30,770 rentable square feet.

�

I.��The Lease has been amended by an Eighth Amendment to lease dated June 2, 2011, whereby Landlord granted Tenant use of “Rooftop Equipment” (as defined therein).

�

K.��The Lease has been amended by a Tenth Amendment to Lease dated April 1, 2014, whereby Landlord leased Suite 150 in Building B on a temporary basis.

�

L.��The Lease Agreement, as amended from time to time, is referred to as the “Lease”.

�

M.��The Premises, including Suite 160 and Suite 150 in Building B, currently contain 113,914 rentable square feet.

�

N.��The current term of the Lease expires on March 31, 2016.

�

O.��Tenant desires to extend each of the Suite 150 Term and the Temporary Premises Term and to amend the terms and conditions of the Lease as set forth in this Agreement.

�

P.��Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Lease.

�

AGREEMENT

�

NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereby mutually agree as follows:

�

1.��EXTENSION OF TEMPORARY PREMISES TERM. The current Temporary Premises Term with respect to Suite 160 in Building B expires on January 31, 2015. The Temporary Premises Term is hereby extended by fourteen (14) months from February�1, 2015 (the “Temporary Premises Extension Commencement Date”), to terminate on March 31, 2016.

�

2.��TEMPORARY PREMISES BASE RENT. From and after the Temporary Premises Extension Commencement Date, the Base Rent for the Temporary Premises shall be Two and 75/100 Dollars ($2.75) per rentable square foot per month, full service, for a total of Eight Thousand Six Hundred Four and 75/100 Dollars ($8,604.75) per month, fully serviced, payable in advance on the first day of each month during the Temporary Premises Term.

�

3.��EXTENSION OF SUITE 150 TERM. The current Suite 150 Term with respect to Suite 150 in Building B expires on January 31, 2015. The Suite 150 Term is hereby extended by fourteen (14) months from February�1, 2015 (the “Suite 150 Extension Commencement Date”), to terminate on March 31, 2016.

�

4.��SUITE 150 BASE RENT. From and after the Suite 150 Extension Commencement Date, the Base Rent for Suite 150 shall be Two and 75/100 Dollars ($2.75) per rentable square foot per month, full service, for a total of Eleven Thousand Nine Hundred Sixty-Eight and No/100 Dollars ($11,968.00) per month, fully serviced, payable in advance on the first day of each month during the Suite 150 Term.

�

5.��TENANT’S PERCENTAGE SHARE. Tenant shall pay Operating Expenses for the Temporary Premises and Suite 150 as additional Rent. As of the Temporary Premises Extension Commencement Date, Tenant’s Percentage Share (also referred to as “Tenant’s Prorata Share”) of Operating Expenses for the Temporary Premises shall be Three and Fifty-Five Hundredths Percent (3.55%). As of the Suite 150 Extension Commencement Date, Tenant’s Percentage Share of Operating Expenses for Suite 150 shall be Four and Ninety-Three Hundredths Percent (4.93%). Tenant’s Percentage Share for purposes of this Agreement has been calculated as the ratio that the stipulated rentable area of each of the Temporary Premises and Suite 150 bear to the stipulated rentable area of Building B. If during the Temporary Premises Term or Suite 150 Term there is a physical change in the rentable area of the Temporary Premises or Suite 150, respectively, or Building B (as distinguished from a change in the method of measuring any such rentable area), there shall be a corresponding adjustment to Tenant’s Percentage Share with respect to the Temporary Premises and/or Suite 150, as applicable.

�

6.��OPERATING EXPENSES BASE AMOUNT. The “Base Year” with respect to the Temporary Premises and Suite 150 shall be 2014.

�

7.��PREMISES. For the avoidance of doubt, the term “Premises” as used in the Lease shall include the Temporary Premises and Suite 150.

�

8.��AUTHORITY. Tenant represents and warrants that all necessary corporate actions have been duly taken to permit Tenant to enter into this Agreement and that the person signing this Agreement on behalf of Tenant has been duly authorized and instructed to execute this Agreement. Landlord represents and warrants that all necessary company actions have been duly taken to permit Landlord to enter into this Agreement and that the person signing this Agreement on behalf of Landlord has been duly authorized and instructed to sign this Agreement.

�

9.��BROKERS. Each of Landlord and Tenant warrants and represents that it has dealt with no real estate broker in connection with this Agreement and that no broker is entitled to any commission on account of this Agreement. The party who breaches this warranty shall defend, hold harmless and indemnify the other from any loss, cost, damage or expense, including reasonable attorneys’ fees, arising from the breach; Landlord’s indemnity of Tenant shall include claims by the Broker. Landlord is solely responsible for paying the commission of the Broker in accordance with a separate agreement.

�

10.��FULL FORCE AND EFFECT. Except as expressly modified above, all terms and conditions of the Lease remain in full force and effect and are hereby ratified and confirmed. Landlord and Tenant hereby acknowledge and agree that, except as provided in this Agreement, the Lease has not been modified, amended, canceled, terminated, released, superseded or otherwise rendered of no force or effect.

�

[Signature page follows.]

�

Designated Address for Landlord:

�

Hollis Street Investors II LLC

c/o Bentall Kennedy (U.S.) Limited Partnership

Attn: Dir. of Asset Management

1215 Fourth Avenue, Suite 2400

Seattle, WA 98161

Facsimile: 206-682-4769

�

and to:

�

Hollis Street Investors II LLC

c/o Bentall Kennedy (U.S.) Limited Partnership

Attn: Dir. of Asset Management

7315 Wisconsin Ave., Ste. 350 West

Bethesda, MD 20814

Facsimile: 301-656-9339

�

and to:

�

MEPT Edgemoor REIT, LLC

c/o NewTower Trust Company

Attn: President/MEPT or Patrick O. Mayberry

3 Bethesda Metro Center, Suite 1600

Bethesda, MD 20814

Facsimile: 240-235-9961

�

LANDLORD:

�

Hollis Street Investors II LLC, a Delaware limited liability company

�

By: Hollis Street Investors, L.L.C, a Delaware limited liability company, its Sole Member

�

By: MEPT Hollis Street LLC, a Delaware limited liability company, its Manager

�

By: MEPT Edgemoor REIT LLC, a Delaware limited liability company, its Manager

�

By: Bentall Kennedy (U.S.) Limited Partnership, its Authorized Signatory

�

By: Bentall Kennedy (U.S.) G.P. LLC, its General Partner

�

By: /s/ Bruce Tuesley��

Name: Bruce Tuesley��

Its: Vice President��

�

By: /s/ Mark D. Reinikka��

Name: Mark D. Reinikka��

Its: Senior Vice President��

��10/13/14

�

Designated Address for Tenant:

�

Leapfrog Enterprises, Inc.

Attn: Director of Real Estate and Facilities

6401 Hollis Street

Emeryville, CA 94608

�

With a copy to:

�

Leapfrog Enterprises, Inc.

Attn: General Counsel

6401 Hollis Street

Emeryville, CA 94608

�

TENANT:

�

Leapfrog Enterprises, Inc., a Delaware corporation

�

By: /s/ Raymond L. Arthur��

Name: Raymond L. Arthur��

Its: CFO 9/30/14��

�

Exhibit 10.04

�

DATED September 5, 2014

�

LEAPFROG TOYS (UK) LIMITED

�

and

�

ANTONY HICKS

�

SERVICE AGREEMENT

�

Table of Contents

�

�	�	Page
�	�	�
1.	Interpretation	1
�	�	�
2.	Term of appointment	3
�	�	�
3.	Warranties and Conditions	4
�	�	�
4.	Duties	4
�	�	�
5.	Place of Work	5
�	�	�
6.	Hours of work	6
�	�	�
7.	Salary	6
�	�	�
8.	Expenses	6
�	�	�
9.	Bonus	7
�	�	�
10.	Stock and stock option schemes	7
�	�	�
11.	Pensions	8
�	�	�
12.	Life assurance and private medical insurance	9
�	�	�
13.	Directors' and officers' insurance	9
�	�	�
14.	Car allowance	9
�	�	�
15.	Holidays	10
�	�	�
16.	Incapacity	11
�	�	�
17.	Outside interests	11
�	�	�
18.	Confidential information	12
�	�	�
19.	Intellectual property	12
�	�	�
20.	Ceasing to be a director	13
�	�	�
21.	Payment in lieu of notice	13
�	�	�
22.	Termination without notice	14
�	�	�
23.	Reserved	15
�	�	�
24.	Obligations on termination	15
�	�	�
25.	Post-termination restrictions	16
�	�	�
26.	Disciplinary and grievance procedures	18
�	�	�
27.	Data protection	18
�	�	�
28.	Collective agreements	18
�	�	�
29.	Reconstruction and amalgamation	19
�	�	�
30.	Notices	19
�	�	�
31.	Entire agreement	20
�	�	�
32.	Variation	20
�	�	�
33.	Counterparts	20
�	�	�
34.	Third party rights	20
�	�	�
35.	Governing law and jurisdiction	20

�

-i-

�

THIS AGREEMENT is dated September 5, 2014

�

Parties

�

(1)

LEAPFROG TOYS (UK) LTD incorporated and registered in England and Wales with company number 03891265 whose registered office is at 36 Windsor Street, Uxbridge, Middlesex UB8 1AB (the “Company”).

�

(2)

ANTONY HICKS of [Address Omitted] (“you”)

�

Agreed terms

�

Interpretation

�

1.1

The definitions and rules of interpretation in this clause 1 apply in this Agreement.

�

Appointment: your employment by the Company on the terms of this Agreement.

�

Associated Employer: has the meaning given to it in the Employment Rights Act 1996.

�

Board: the board of directors of the Company (including any committee of the board duly appointed by it).

�

Capacity: as agent, consultant, director, employee, owner, partner, shareholder or in any other capacity.

�

CEO: the Chief Executive Officer of LeapFrog Enterprises, Inc.

�

Change in Control: the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (a) any Exchange Act Person (as defined in the Company’s 2002 Equity Incentive Plan) (other than Michael Milken, Lowell Milken, or any combination of the foregoing), becomes the owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction; (b) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation, or similar transaction, the stockholders of the Company immediately prior thereto do not own, directly or indirectly, outstanding voting securities representing more than fifty percent (50%) of the combined voting power of the surviving entity in such merger, consolidation or similar transaction or more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving entity in such merger, consolidation or similar transaction; (c) the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company; or (d) there is consummated a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale, lease, license, or other disposition.

�

Change in Control Period: the period beginning three (3) months before and ending twelve (12) months after a Change in Control.

�

Confidential Information: information (whether or not recorded in documentary form, or stored on any magnetic or optical disk or memory) relating to the business, products, affairs and finances of the Company and/or any Group Company for the time being confidential to the Company and/or any Group Company and trade secrets including technical data and know-how relating to the business of the Company and/or any Group Company or any of its or their suppliers, clients, customers, agents, distributors, shareholders, management or other business contacts including information that you create, develop, receive or obtain in connection with the Appointment, whether or not such information (if in anything other than oral form) is marked confidential.

�

Financial Year: the financial year of the Company being the period from 1 April to 31 March each year.

�

Group Company: Subsidiary and/or Holding Companies of the Company from time to time and any Subsidiary of any Holding Company from time to time.

�

Incapacity: any sickness, injury or other medical disorder or condition which prevents you from carrying out your duties.

�

Intellectual Property Rights: patents, rights to Inventions, copyright and related rights, trade marks, trade names and domain names, rights in get-up, rights in goodwill or to sue for passing off, unfair competition rights, rights in designs, rights in computer software, database rights, topography rights, rights in confidential information (including know-how and trade secrets) and any other intellectual property rights, in each case whether registered or unregistered and including all applications (or rights to apply) for, and renewals or extensions of, such rights and all similar or equivalent rights or forms of protection which subsist or will subsist now or in the future in any part of the world.

�

Invention: any invention, idea, discovery, development, improvement or innovation, whether or not patentable or capable of registration, and whether or not recorded in any medium.

�

Pre-Contractual Statement: any undertaking, promise, assurance, statement, representation, warranty or understanding (whether in writing or not) of any person (whether party to this Agreement or not) relating to the Appointment which is not expressly set out in this Agreement or any documents referred to in it.

�

Restricted Business: the business or parts of the business of the Company and any Group Company with which you were involved to a material extent in the 12 months before the Termination Date.

�

Restricted Customer: any firm, company or person who, during the 12 months before the Termination Date, was a customer or prospective customer of or was in the habit of dealing with the Company or any Group Company and with whom you had material contact or about whom you became aware or informed in the course of employment.

�

Restricted Person: anyone employed or engaged by the Company or any Group Company who could materially damage the interests of the Company or any Group Company if they were involved in any Capacity in any business concern which competes with any Restricted Business and with whom you dealt in the 12 months before the Termination Date in the course of your employment.

�

Subsidiary and Holding Company: in relation to a company mean "subsidiary" and "holding company" as defined in section 1159 of the Companies Act 2006 and a company shall be treated, for the purposes only of the membership requirement contained in subsections 1159(1)(b) and (c), as a member of another company even if its shares in that other company are registered in the name of (a) another person (or its nominee), whether by way of security or in connection with the taking of security, or (b) a nominee.

�

Termination: the termination of the Appointment however caused.

�

Termination Date: the last date of employment, including any notice period under Clause 2.1.

�

1.2

The headings in this Agreement are inserted for convenience only and shall not affect its construction.

�

1.3

A reference to a particular law is a reference to it as it is in force for the time being taking account of any amendment, extension, or re-enactment and includes any subordinate legislation for the time being in force made under it.

�

1.4

Unless the context otherwise requires, a reference to one gender shall include a reference to the other genders.

�

1.5

Unless the context otherwise requires, words in the singular include the plural and in the plural include the singular.

�

1.6

The words “include”, “including”, “without limitation” and any similar phrase will be construed as meaning without limitation.

�

Term of appointment

�

2.1

The Appointment shall commence on September 29, 2014 (the “Commencement Date”) and shall continue, subject to the remaining terms of this Agreement, until terminated:

�

(a)

by the Company providing you with no less than two months written notice; or

�

(b)

by you providing the Company with no less than two months’ prior written notice.

�

2.2

No employment with a previous employer counts towards your period of continuous employment with the Company.

�

2.3

You consent to the transfer of the Appointment to an Associated Employer at any time provided that your place of work does not change other than in accordance with this Agreement.

�

Warranties and Conditions

�

3.1

You represent and warrant to the Company that, by entering into this Agreement or performing any of your obligations under it, you will not be in breach of any court order or any express or implied terms of any contract or other obligation binding on you and undertake to indemnify the Company and/or any Group Company against any claims, costs, damages, liabilities or expenses which the Company and/or any Group Company may incur as a result if you are in breach of any such obligations.

�

3.2

You warrant that you are entitled to work in the United Kingdom without any additional approvals and will notify the Company immediately if you cease to be so entitled during the Appointment.

�

3.3

You warrant that you are not subject to any restrictions which prevent you from holding office as a director.

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Duties

�

4.1

You shall serve the Company as Chief International Officer (or such other role as the Board, together with the CEO, considers appropriate from time to time). You shall report directly to the CEO.

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4.2

During the Appointment you shall:

�

(a)

act as a director or officer of the Company and of any Group Company as may be requested by the CEO;

�

(b)

comply with the articles of association (as amended from time to time) of the Company and any Group Company of which you are a director or officer;

�

(c)

abide by any statutory, fiduciary or common-law duties to the Company and/or any Group Company of which you are a director or officer;

�

(d)

not do anything that would cause you to be disqualified from acting as a director or officer;

�

(e)

comply with the Company's anti-corruption and bribery policy and related procedures;

�

(f)

unless prevented by Incapacity, devote the whole of your time, attention and abilities to the business of the Company and any Group Company of which you are an officer;

�

(g)

faithfully and diligently exercise such powers and perform such duties as may from time to time be assigned to you by the CEO together with such person or persons as may be appointed to act jointly with you;

�

(h)

comply with all reasonable and lawful directions given to you by the CEO;

�

(i)

promptly make such reports to the CEO in connection with the affairs of the Company and/or any Group Company on such matters and at such times as are reasonably required;

�

(j)

report your own wrongdoing and any wrongdoing or proposed wrongdoing of any other employee, director or officer of the Company and/or any Group Company to the CEO immediately on becoming aware of it;

�

(k)

use your best endeavours to promote, protect, develop and extend the business of the Company and any Group Company; and

�

(l)

consent to the Company monitoring and recording any use that you make of the Company's electronic communications systems for the purpose of ensuring that the Company's rules are being complied with and for legitimate business purpose.

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4.3

You shall comply with any staff rules, policies and procedures of the Company and/or any Group Company in place from time to time. Such rules, policies and procedures do not form part of this Agreement and the Company may amend them at any time. To the extent that there is any conflict between the terms of this Agreement and such rules, policies and procedures, this Agreement shall prevail.

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4.4

All documents, manuals, hardware and software provided for your use by the Company, and any data or documents (including copies) produced, maintained or stored on the Company's computer systems or other electronic equipment (including mobile phones), remain the property of the Company.

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Place of Work

�

5.1

Other than significant overseas work, your normal place of work is your home with visits as and when required to the Company’s offices at 36 Windsor Street, Uxbridge or such other place which the Company may reasonably require for the proper performance and exercise of your duties.

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5.2

You agree to travel on the Company's and/or any Group Company's business (both within the United Kingdom or abroad) as may be required for the proper performance of your duties.

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5.3

During the Appointment you shall not be required to work outside the United Kingdom for any continuous period of more than one month.

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Hours of work

�

6.1

Your normal working hours shall be 9:00 am to 5:30 pm on Mondays to Fridays and such additional hours as are necessary for the proper performance of your duties. You acknowledge that you shall not receive further remuneration in respect of such additional hours.

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6.2

It is the Company’s understanding that, in accordance with Regulation 20 of the Working Time Regulations (the “WTR”), your working time is not measured or pre-determinable by you. Notwithstanding that, to the extent that Regulation 4(1) of the WTR applies to you, you hereby agree in accordance with Regulation 5 of the WTR that the limit of maximum weekly working time set out in Regulation 4(1) of the WTR will not apply to you during the Appointment. You acknowledge that you may terminate such opt out at any time by giving the Company not less than three months’ written notice.

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Salary

�

7.1

You shall be paid a gross salary of �280,000 per annum (inclusive of any fees due to you by the Company and/or any Group Company as a director or officer of the Company and/or any Group Company) (“Salary”).

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7.2

Your Salary shall accrue from day to day and be payable monthly in arrears on or about the last day of each calendar month directly into your nominated bank or building society following deductions for income tax and national insurance contributions, as required.

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7.3

Your Salary shall be reviewed by the Board, together with the CEO, annually, the first such review to take place in 2015 at the same time as the salary review of the Company’s other senior executives. The Company is under no obligation to award an increase following a salary review. There will be no review of the Salary after notice has been given by either party to terminate the Appointment.

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7.4

The Company may deduct from the Salary, or any other sums owed to you, any money owed to the Company and/or any Group Company by you.

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Expenses

�

8.1

The Company shall reimburse (or procure the reimbursement of) all reasonable expenses wholly, properly and necessarily incurred by you in the course of the Appointment, subject to production of VAT receipts or such other appropriate evidence of payment as the Company may request.

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8.2

You shall abide by the Company's policies on expenses in place from time to time.

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Bonus

�

9.1

For Financial Year 2015 (the annual period ending March 31, 2015), you shall be entitled to receive a guaranteed bonus equal to 75% of the actual Salary accrued by and payable to you in respect of the period from the Commencement Date to the end of Financial Year 2015, which will be payable to you at the same time the Company generally pays bonuses to its other employees (currently expected to be on or before 30 June 2015) (the “Payment Date”).

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9.2

In respect of each subsequent Financial Year, you shall be entitled to participate in the bonus scheme for senior executives. The amount of your bonus in any particular Financial Year (if any payable) shall be determined by the Board in its sole discretion based on your and the Company’s, and any relevant Group Company’s, achievement of targets which will be notified to you by the Board from time to time.

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9.3

Any bonus payment awarded to you shall be purely discretionary and shall not form part of your contractual remuneration under this Agreement. If the Company makes a bonus payment to you in respect of a particular Financial Year, it shall not be obliged to make subsequent bonus payments in respect of any subsequent Financial Years.

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9.4

The Company may alter the terms of any bonus targets or withdraw them altogether at any time without prior notice to you.

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9.5

You will have no right to a bonus or time-apportioned bonus in the event you terminate the Appointment or the Appointment is terminated pursuant to Clause 22.

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9.6

Any bonus payments shall not be pensionable.

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10.

Stock and stock option schemes

�

10.1

During the Appointment you will be invited to participate in the LeapFrog Enterprises, Inc. Employee Stock Purchase Plan (the “Plan”) in accordance with the rules of the Plan, as relevant, in force and as amended from time to time. Your participation will be voluntary and will not constitute a contractual entitlement under this Agreement. Any extinction or curtailment of any rights, benefits or expectations under the Plan by reason of any transfer or termination of your Appointment, howsoever arising, will not give rise to any claim for compensation and your rights or benefits under the Plan will be determined in accordance with the Plan rules and not in accordance with the provisions of this Agreement (other than this Clause). The Company reserves the right to modify or alter the Plan at any time for any reason.

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10.2

You will be granted 175,000 stock options (the “Stock Options”) and 100,000 restricted stock units (“RSUs”), both pursuant to the Plan and in accordance with LeapFrog Enterprises, Inc.’s policy with respect to grant date and vesting commencement date. Subject to your Continuous Service (as defined in the Plan), (a) one-quarter (1/4) of the Stock Options shall vest on the one-year anniversary of the vesting commencement date; thereafter the balance of the Stock Options shall vest over three (3) years, on the monthly anniversary of the vesting commencement date, in thirty-six (36) equal monthly instalments, and (b) one-quarter (1/4) of the RSUs shall vest on the 1st, 2nd, 3rd and 4th year anniversaries of the Vesting Commencement Date. In each Financial Year, you will be considered for an annual equity grant at the same time as the other senior executives at the Company, it being understood that such equity grants are in the sole discretion of the Compensation Committee of LeapFrog Enterprises, Inc.

�

10.3

If, during a Change in Control Period, the Company terminates your employment other than pursuant to clauses 22.1(a) - 22.1(l), or if you resign as a result of, and within sixty (60) days after the occurrence of, one of the following events without your consent: (a) a material diminution in your authority, duties, or responsibilities within twelve months following a Change in Control; (b) a reduction in your Salary in an amount greater than ten percent (10%) of your Salary prior to such reduction; (c) a change in the geographic location of your workplace by more than fifty (50) miles from its previous location; or (d) a material breach by the Company of this Agreement, the following shall occur: (i) the vesting and exercisability of all outstanding options to purchase the Company’s stock held by you on such date shall be accelerated in full, and (ii) all other stock awards that are held by you on such date shall vest in full, and any reacquisition or repurchase rights held by the Company with respect to such stock awards shall lapse.� Any such options shall remain exercisable by you until the period provided by the agreements evidencing such options, but in no event beyond the expiration date of such options.� No accelerated vesting benefits will be provided if your employment terminates outside of the Change in Control Period.

�

11.

Pensions

�

11.1

You may join the Company's stakeholder pension scheme (the “Scheme”) (or such other registered pension scheme as may be set up by the Company to replace the Scheme) subject to satisfying certain eligibility criteria and subject to the rules of the Scheme as amended from time to time. Full details of the Scheme are available from the Human Resources Department.

�

11.2

You may make contributions to the scheme of an amount up to the lower of 100% of your Salary and the annual allowance set by HM Revenue & Customs from time to time. Such contributions shall be payable in equal monthly instalments in arrears and shall be made by way of deduction from your Salary.

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11.3

If you join the Scheme, the Company shall contribute an amount equal to 5% of your Salary or, if lower, the contributions payable by you to the Scheme during each year of the Appointment. The Company's contributions to the Scheme shall be payable in equal monthly instalments in arrears, and shall be subject to the rules of the Scheme and the tax reliefs and exemptions available from HM Revenue & Customs, as amended from time to time.

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11.4

A contracting-out certificate is not in force in respect of the Appointment.

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12.

Life assurance and private medical insurance

�

12.1

You shall be entitled to participate in the Company's life assurance scheme and the Company’s private medical insurance scheme subject to:

�

(a)

the terms of those schemes, as amended from time to time;

�

(b)

the rules and/or the insurance policy of the relevant insurance provider(s), as amended from time to time; and

�

(c)

you satisfying the normal underwriting requirements of the relevant insurance provider(s) and the premium being at a rate which the Company considers reasonable.

�

Full details of the scheme are available from the Human Resource Department.

�

12.2

If the insurance provider(s) refuse for any reason to provide life assurance benefit and/or private medical insurance benefit to you the Company shall not be liable to provide any replacement benefit of the same or similar kind or to pay any compensation in lieu of such benefit.

�

12.3

The Company in its sole and absolute discretion reserves the right to discontinue, vary or amend its life assurance and/or private medical insurance scheme(s) (including the level of your cover) at any time on reasonable notice to you.

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13.

Directors' and officers' insurance

�

During the Appointment and for six years following the Termination Date you shall be entitled to be covered by a policy of directors' and officers' liability insurance on terms no less favourable than those in place from time to time for other officers of the Company. A copy of the policy is available from the Human Resources Department.

�

14.

Car allowance

�

14.1

Provided that you hold a current driving licence, you shall receive a car allowance for use of your own car of �8,900 per annum which shall be payable together with and in the same manner as the salary in accordance with clause 7. The car allowance shall not be treated as part of the basic salary for any purpose and shall not be pensionable.

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14.2

The Company shall reimburse you in respect of fuel costs for business miles at HM Revenue and Customs approved rates.

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14.3

You shall immediately inform the Company if you are disqualified from driving and shall cease to be entitled to receive the allowance under clause 14.1 or reimbursement of fuel expenses under clause 14.2.

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15.

Holidays

�

15.1

You shall be entitled to 25 days' paid holiday in each holiday year (increasing to 27 day’s paid holiday after 3 years of service) together with the usual public holidays in England. The Company's holiday year runs between 1 January and 31 December. If the Appointment commences or terminates part way through a holiday year, your entitlement during that holiday year shall be calculated on a pro-rata basis.

�

15.2

Holiday shall be taken at such time or times as shall be approved in advance by the CEO. You shall not, without the consent of the CEO, carry forward any accrued but untaken holiday entitlement to a subsequent holiday year unless you have been unavoidably prevented from taking such holiday during the relevant leave year because of sickness absence or statutory maternity, paternity or adoption leave.

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15.3

You shall have no entitlement to any payment in lieu of accrued but untaken holiday except on termination of the Appointment. Subject to clause 15.4 the amount of such payment in lieu shall be 1/260th of your Salary for each untaken day of the entitlement under clause 15.1 for the holiday year in which termination takes place and any untaken days carried forward from the preceding holiday year.

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15.4

If the Company has terminated or would be entitled to terminate the Appointment under clause 22, or, if you have terminated the Appointment in breach of this Agreement, any payment due under clause 15.3 shall be limited to your statutory entitlement under the Working Time Regulations 1998 and any paid holidays (including paid public holidays) taken shall be deemed first to have been taken in satisfaction of that statutory entitlement.

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15.5

If on termination of the Appointment you have taken in excess of your accrued holiday entitlement, the Company shall be entitled to recover from you, by way of deduction from any payments due to you or otherwise, one day's pay calculated at 1/260th of your Salary for each excess day.

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15.6

If either party has served notice to terminate the Appointment, the CEO may require you to take any accrued but unused holiday entitlement during the notice period.

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15.7

During any continuous period of absence due to Incapacity of one month or more you shall not accrue holiday under this Agreement and your entitlement under clause 15.1 for the holiday year in which such absence takes place shall be reduced pro rata save that it shall not fall below your entitlement under the Working Time Regulations 1998.

�

16.

Incapacity

�

16.1

If you are absent from work due to Incapacity, you must notify the CEO of the reason for your absence as soon as possible on your first day of absence. In all cases of absence a self-certification form must be completed on your return to work. For any period of Incapacity which lasts for more than seven consecutive days, a doctor’s certificate stating the reason for absence must be obtained. Further certificates must be obtained if the absence continues for longer than the period of the original certificate.

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16.2

During any absence due to Incapacity in excess of six (6) business days in a calendar year, the Company shall pay you Statutory Sick Pay (“SSP”) provided that you satisfy the relevant requirements. Your qualifying days for SSP purposes are Monday to Friday.

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16.3

You agree to consent to medical examinations (at the Company's expense) by a doctor nominated by the Company should the Company so require. You agree that any report produced in connection with any such examination may be disclosed to the Company and the Company may discuss the contents of the report with the relevant doctor and may disclose its contents with any Group Company.

�

16.4

The rights of the Company to terminate the Appointment under the terms of this Agreement apply even when such termination would or might cause you to forfeit any entitlement to sick pay or other benefits.

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17.

Outside interests

�

17.1

Subject to clause 17.2, during the Appointment you shall not, except as a representative of the Company or with the prior written approval of the Board and the CEO, whether paid or unpaid, be directly or indirectly engaged, concerned or have any financial interest in any Capacity in any other business, trade, profession or occupation (or the setting up of any business, trade, profession or occupation).

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17.2

Notwithstanding clause 17.1, you may hold an investment by way of shares or other securities of not more than 5% of the total issued share capital of any company (whether or not it is listed or dealt in on a recognised stock exchange) and invest in a real estate company, solely owned by your family; where such company does not carry on a business similar to or competitive with any business for the time being carried on by the Company and/or any Group Company.

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17.3

You agree to disclose to the Board and the CEO any matters relating to your spouse or civil partner (or anyone living as such), children or parents which may, in the reasonable opinion of the Board or the CEO, be considered to interfere, conflict or compete with the proper performance of your obligations under this Agreement.

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18.

Confidential information

�

18.1

You acknowledge that in the course of the Appointment you will have access to Confidential Information. You have therefore agreed to accept the restrictions in this clause 18.

�

18.2

You shall not (except in the proper course of your duties), either during the Appointment or at any time after its termination (however arising), use or disclose to any person, company or other organisation whatsoever (and shall use your best endeavours to prevent the publication or disclosure of) any Confidential Information. This shall not apply to:

�

(a)

any use or disclosure authorised in advance by the Board and the CEO or required by law;

�

(b)

any information which is already in, or comes into, the public domain other than through your unauthorised disclosure; or

�

(c)

any protected disclosure within the meaning of section 43A of the Employment Rights Act 1996.

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19.

Intellectual property

�

19.1

You shall give the Company full written details of all Inventions and of all works embodying Intellectual Property Rights made wholly or partially by you at any time during the course of the Appointment which relate to, or are reasonably capable of being used in, the business of the Company and/or any Group Company. You acknowledge that all Intellectual Property Rights subsisting (or which may in the future subsist) in all such Inventions and works shall automatically, on creation, vest in the Company absolutely. To the extent that they do not vest automatically, you hold them on trust for the Company. You agree promptly to execute all documents and do all acts as may, in the opinion of the Company, be necessary to give effect to this clause 19.1.

�

19.2

You hereby irrevocably waive all moral rights under the Copyright, Designs and Patents Act 1988 (and all similar rights in other jurisdictions) which you have or will have in any existing or future works referred to in clause 19.1.

�

19.3

You irrevocably appoint the Company to be your attorney in your name and on your behalf to execute documents, use your name and do all things which are necessary or desirable for the Company to obtain for itself or its nominee the full benefit of this clause. A certificate in writing, signed by any director or the secretary of the Company, that any instrument or act falls within the authority conferred by this Agreement shall be conclusive evidence that such is the case so far as any third party is concerned.

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20.

Ceasing to be a director

�

20.1

Except with the prior approval of the Board and the CEO, or as provided in the articles of association of the Company and/or any Group Company of which you are a director or officer, once appointed, you shall not resign as a director or officer of the Company and/or any Group Company, other than upon your last day of employment with the Company.

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20.2

If, once appointed, you cease to be a director or officer of the Company and/or any Group Company (otherwise than by reason of death, resignation or disqualification pursuant to the articles of association of the Company and/or the relevant Group Company, as amended from time to time, or by statute or court order) the Appointment shall continue with you as an employee only and the terms of this Agreement (other than those relating to the holding of the office of director or officer) shall continue in full force and effect. You shall have no claims in respect of such cessation of directorship or office.

�

21.

Effect of Termination by Company under Clause 2.1

�

21.1

In the event Company terminates your employment pursuant to Clause 2.1,

�

(a)

You will be paid your salary, receive benefits, and your equity will continue to vest, until the Termination Date. For the avoidance of doubt this will include pro-rata vesting for any partial year up to the Termination Date.

�

(b)

You will receive cash severance benefits equal to six (6) months of your base Salary if notice of termination is given in the nine month period following the Commencement Date and twelve (12) months of your then-current base Salary if notice of termination is given thereafter (the “Base Severance”).

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(c)

You will be eligible for a pro-rated bonus based on the portion of the then-current financial year you are an employee (the “Bonus Severance”). The amount of the Bonus Severance is subject to the achievement of the goals under the Company’s then-current bonus plan and approval of the LeapFrog Enterprise, Inc. Compensation Committee. The Bonus Severance will be paid to you on the Company’s regular bonus payment date. The Base Severance and Bonus Severance are collectively referred to as the “Severance Payments.”

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21.2

The Company will pay the Base Severance in equal monthly instalments over the 6 or 12 month period following the Termination Date, as applicable per Clause 21(b). The Severance Payments will be less income tax and national insurance contributions. You agree to sign an agreement releasing the Company of any claims you may have against the Company prior to receiving any Severance Payments.

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21.3

Nothing in this clause 21 shall prevent the Company from terminating the Appointment in breach.

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21.4

Notwithstanding clause 21.1 you shall not be entitled to the Severance Payments if the Company would otherwise have been entitled to terminate the Appointment without notice in accordance with clause 22. In that case the Company shall also be entitled to recover from you any Severance Payments (or instalments thereof) already made.

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22.

Termination without notice

�

22.1

The Company may also terminate the Appointment with immediate effect without notice and with no liability to make any further payment to you (other than in respect of amounts accrued due at the date of termination) if you:

�

(a)

are disqualified from acting as a director or officer or resign as a director or officer from the Company and/or any Group Company without the prior written approval of the Board and the CEO;

�

(b)

fail or cease to meet the requirements of any regulatory body whose consent is required to enable you to undertake all or any of your duties under the Appointment or are guilty of a serious breach of the rules and regulations of such regulatory body or of any compliance manual of the Company and/or any Group Company;

�

(c)

are in breach of the Company's anti-corruption and bribery policy and related procedures;

�

(d)

are guilty of any gross misconduct affecting the business of the Company and/or any Group Company;

�

(e)

commit any serious or repeated breach or non-observance of any of the provisions of this Agreement or refuse or neglect to comply with any reasonable and lawful directions of the Board and/or the CEO;

�

(f)

are, in the reasonable opinion of the Board, negligent and incompetent in the performance of your duties;

�

(g)

are declared bankrupt or makes any arrangement with or for the benefit of your creditors or have a county court administration order made against you under the County Court Act 1984;

�

(h)

are convicted of any criminal offence (other than an offence under any road traffic legislation in the United Kingdom or elsewhere for which a fine or non-custodial penalty is imposed) or any offence under any regulation or legislation relating to insider dealing;

�

(i)

become of unsound mind (which includes lacking capacity under the Mental Capacity Act 2005), or a patient under any statute relating to mental health;

�

(j)

cease to be eligible to work in the United Kingdom;

�

(k)

are guilty of any fraud or dishonesty or act in any manner which in the opinion of the Board brings or is likely to bring you or the Company and/or any Group Company into disrepute or is materially adverse to the interests of the Company and/or any Group Company;

�

(l)

are guilty of a serious breach of any rules issued by the Company from time to time regarding its electronic communications systems; or

�

22.2

The rights of the Company under clause 22.1 are without prejudice to any other rights that it might have at law to terminate the Appointment or to accept any breach of this Agreement by you as having brought this Agreement to an end. Any delay by the Company in exercising its rights to terminate shall not constitute a waiver thereof.

�

23.

Reserved

�

24.

Obligations on termination

�

24.1

On termination of the Appointment (however arising), you shall:

�

(a)

resign immediately without compensation from any office that you hold in or on behalf of the Company and/or any Group Company;

�

(b)

transfer, without payment, to the Company or as it may direct any shares or other securities held by you in the Company or any Group Company as a nominee or trustee for the Company or any Group Company and deliver to the Company the related certificates (for the avoidance of doubt, this Clause does not apply to vested equity grants to you as an employee);

�

(c)

subject to clause 24.2, immediately deliver to the Company all documents, books, materials, records, correspondence, papers and information (on whatever media and wherever located) relating to the business or affairs of the Company and/or any Group Company or its or their business contacts, any keys, credit card and any other property of the Company or any Group Company, which is in your possession or under your control;

�

(d)

irretrievably delete any information relating to the business of the Company or any Group Company stored on any magnetic or optical disk or memory and all matter derived from such sources which is in your possession or under your control outside the Company's premises; and

�

(e)

provide a signed statement that you have complied fully with your obligations under this clause 24.1 together with such reasonable evidence of compliance as the Company may request.

�

24.2

You hereby irrevocably appoint the Company to be your attorney to execute and do any such instrument or thing and generally to use your name for the purpose of giving the Company or its nominee the full benefit of clause 24.1(a) and clause 24.1(b).

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24.3

Except as set forth in Clauses 10.3 and 22, on termination of the Appointment howsoever arising you shall not be entitled to any compensation for the loss of any rights or benefits under any share option, bonus, long-term incentive plan or other profit sharing scheme operated by the Company and/or any Group Company in which you may participate.

�

25.

Post-termination restrictions

�

25.1

In order to protect the confidential information, trade secrets and business connections of the Company and each Group Company to which you have access as a result of the Appointment, you covenant with the Company (for itself and as trustee and agent for each Group Company) that you shall not:

�

(a)

for six months after the Termination Date solicit or endeavour to entice away from the Company or any Group Company the business or custom of a Restricted Customer with a view to providing goods or services to that Restricted Customer in competition with any Restricted Business;

�

(b)

for 12 months after the Termination Date in the course of any business concern which is in competition with any Restricted Business, offer to employ or engage or otherwise endeavour to entice away from the Company or any Group Company any Restricted Person;

�

(c)

for 12 months after the Termination Date in the course of any business concern which is in competition with any Restricted Business, employ or engage or otherwise facilitate the employment or engagement of any Restricted Person, whether or not such person would be in breach of contract as a result of such employment or engagement;

�

(d)

for 12 months after the Termination Date, be involved in any Capacity with any business concern which is (or intends to be) in competition with any Restricted Business;

�

(e)

for 12 months after the Termination Date be involved with the provision of goods or services to (or otherwise have any business dealings with) any Restricted Customer in the course of any business concern which is in competition with any Restricted Business; or

�

(f)

at any time after the Termination Date, represent yourself as connected with the Company or any Group Company in any Capacity, other than as a former employee, or use any registered business names or trading names associated with the Company or any Group Company.

�

25.2

None of the restrictions in clause 25.1 shall prevent you from:

�

(a)

holding an investment by way of shares or other securities of not more than 5% of the total issued share capital of any company, whether or not it is listed or dealt in on a recognised stock exchange;

�

(b)

being engaged or concerned in any business concern insofar as your duties or work shall relate solely to geographical areas where the business concern is not in competition with any Restricted Business; or

�

(c)

being engaged or concerned in any business concern, provided that your duties or work shall relate solely to services or activities of a kind with which you were not concerned to a material extent in the 12 months before the Termination Date.

�

25.3

The restrictions imposed on you by this clause 25 apply to you acting:

�

(a)

directly or indirectly; and

�

(b)

on your own behalf or on behalf of, or in conjunction with, any firm, company or person.

�

25.4

If you receive an offer to be involved in a business concern in any Capacity during the Appointment, or before the expiry of the last of the covenants in this clause 25, you shall give the person making the offer a copy of this clause 25 and shall tell the Company the identity of that person as soon as possible.

�

25.5

The Company and you entered into the restrictions in this clause 25 having been separately legally advised.

�

25.6

Each of the restrictions in this clause 25 is intended to be separate and severable. If any of the restrictions shall be held to be void but would be valid if part of their wording were deleted, such restriction shall apply with such deletion as may be necessary to make it valid or effective.

�

25.7

If your employment is transferred to any firm, company, person or entity other than a Group Company (the “New Employer”) pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006, you will, if required, enter into an agreement with the New Employer containing post-termination restrictions corresponding to those restrictions in this clause 25, protecting the confidential information, trade secrets and business connections of the New Employer.

�

25.8

You will, at the request and expense of the Company, enter into a separate agreement with any Group Company in which you agree to be bound by restrictions corresponding to those restrictions in this clause 25 (or such of those restrictions as the Company deems appropriate) in relation to that Group Company.

�

26.

Disciplinary and grievance procedures

�

26.1

You are subject to any disciplinary and grievance procedures implemented by the Company from time to time. Such procedures do not form part of your contract of employment.

�

26.2

If you want to raise a grievance, you may apply in writing to a member of the Board or the CEO.

�

26.3

If you wish to appeal against a disciplinary decision you may apply in writing to a member of the Board or the CEO.

�

26.4

The Board may suspend you, with pay, from any or all of your duties during any period in which the Company is investigating any disciplinary matter involving you or while any disciplinary procedure against you is outstanding.

�

27.

Data protection

�

27.1

You consent to the Company and/or any Group Company processing data relating to you for legal, personnel, administrative and management purposes and in particular to the processing of any sensitive personal data (as defined in the Data Protection Act 1998) relating to you, including, as appropriate:

�

(a)

information about your physical or mental health or condition in order to monitor sick leave and take decisions as to your fitness for work;

�

(b)

your racial or ethnic origin or religious or similar information in order to monitor compliance with equal opportunities legislation; and

�

(c)

information relating to any criminal proceedings in which you have been involved for insurance purposes and in order to comply with legal requirements and obligations to third parties.

�

27.2

The Company may make such information available to any Group Company, those who provide products or services to the Company and/or any Group Company (such as advisers and payroll administrators), regulatory authorities, potential or future employers, governmental or quasi-governmental organisations and potential purchasers of the Company or the business in which you work.

�

27.3

You consent to the transfer of such information to any Group Company and the Company's and/or any Group Company's business contacts outside the European Economic Area in order to further its or their business interests even where the country or territory in question does not maintain adequate data protection standards.

�

28.

Collective agreements

�

There is no collective agreement which directly affects the Appointment.

�

29.

Reconstruction and amalgamation

�

If the Appointment is terminated at any time by reason of any reconstruction or amalgamation of the Company or any Group Company, whether by winding up or otherwise, and you are offered employment with any concern or undertaking involved in or resulting from the reconstruction or amalgamation on terms which (considered in their entirety) are no less favourable to any material extent than the terms of this Agreement, you shall have no claim against the Company or any such undertaking arising out of or connected with the termination.

�

30.

Notices

�

30.1

A notice given to a party under this Agreement shall be in writing in the English language and signed by or on behalf of the party giving it. It shall be delivered by hand or sent to the party at the address or fax number given in this Agreement or as otherwise notified in writing to the other party.

�

30.2

Any such notice shall be deemed to have been received:

�

(a)

if delivered by hand, at the time the notice is left at the address or given to the addressee;

�

(b)

in the case of pre-paid first class UK post or other next working day delivery service, at 9.00 am on the second business day after posting or at the time recorded by the delivery service;

�

(c)

in the case of pre-paid airmail, 9.00 am on the fifth Business Day after posting or at the time recorded by the delivery service; or

�

(d)

in the case of fax, at the time of transmission.

�

30.3

A notice shall have effect from the earlier of its actual or deemed receipt by the addressee. For the purpose of calculating deemed receipt:

�

(a)

all references to time are to local time in the place of deemed receipt; and

�

(b)

if deemed receipt would occur on a Saturday or Sunday or a public holiday when banks are not open for business, deemed receipt is at 9.00 am on the next business day.

�

30.4

A notice required to be given under this Agreement shall not be validly given if sent by e-mail.

�

30.5

This clause does not apply to the service of any proceedings or other documents in any legal action.

�

31.

Entire agreement

�

31.1

This Agreement and any document(s) referred to in it constitutes the whole agreement between the parties (and in the case of the Company, as agent for any Group Company) and supersedes all previous discussions, correspondence, negotiations, arrangements, understandings and agreements between them relating to its subject matter.

�

31.2

Each party acknowledges that in entering into this Agreement it has not relied on and shall have no remedy in respect of any Pre-Contractual Statement.

�

31.3

Each party agrees that its only liability in respect of those representations and warranties that are set out in this Agreement (whether made innocently or negligently) shall be for breach of contract.

�

31.4

Nothing in this Agreement shall limit or exclude any liability for fraud.

�

32.

Variation

�

No variation or agreed termination of this Agreement shall be effective unless it is in writing and signed by the parties (or their authorised representatives).

�

33.

Counterparts

�

This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, and all the counterparts together shall constitute one and the same instrument.

�

34.

Third party rights

�

No person other than a party to this Agreement may enforce any of its terms.

�

35.

Governing law and jurisdiction

�

35.1

This Agreement and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the law of England and Wales.

�

35.2

The parties irrevocably agree that the courts of England and Wales shall have non-exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this Agreement or its subject matter or formation (including non-contractual disputes or claims).

�

This document has been executed as a deed and is delivered and takes effect on the date stated at the beginning of it.

�

Signed as a Deed by LEAPFROG TOYS (UK) LIMITED acting by JOHN BARBOUR:�

/s/ John Barbour (sign)

�

Signed as a Deed

By ANTONY HICKS:

/s/ Antony Hicks (sign)

�

Exhibit 31.01

�

CERTIFICATION

�

I, John Barbour, certify that:

�

I have reviewed this Quarterly Report on Form 10-Q of LeapFrog Enterprises, Inc.;

�

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

�

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

�

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

�

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

�

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

�

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

�

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

�

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):

�

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, 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.

�

Date: November 10, 2014	/s/ John Barbour
�	John Barbour
�	Chief Executive Officer

�

Exhibit 31.02

�

CERTIFICATION

�

I, Raymond L. Arthur, certify that:

�

I have reviewed this Quarterly Report on Form 10-Q of LeapFrog Enterprises, Inc.;

�

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.

�

Date: November 10, 2014	/s/ Raymond L. Arthur
�	Raymond L. Arthur
�	Chief Financial Officer

�

Exhibit 32.01

�

Certifications of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section�1350

�

Pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act 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 that, to the best of his knowledge:

�

The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, to which this Certification is attached as Exhibit 32.01 (the “Quarterly Report”), fully complies with the requirements of Section�13(a) or Section�15(d) of the Exchange Act, as applicable; and

�

The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Quarterly Report and results of operations of the Company for the periods covered in the financial statements in the Quarterly Report.

�

Dated: November 10, 2014

�

/s/ John Barbour	�	/s/ Raymond L. Arthur
�	�	�
John Barbour	�	Raymond L. Arthur
Chief�Executive�Officer	�	Chief�Financial�Officer

�

Note:

This certification accompanies the Quarterly Report pursuant to 18 U.S.C. Section�1350 and shall not be deemed “filed” by the Company for purposes of Section�18 of the Exchange Act, or incorporated by reference into any filing of the Company under the Exchange Act or the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

�

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Form 10-Q LEAPFROG ENTERPRISES For: Sep 30

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