LeapFrog 2002 Annual Report Download - page 35

were considered compensatory because the deemed fair value of the underlying shares of Class A common stock
in August 2001, as subsequently determined, was greater than the exercise price of the options. In accordance
with Accounting Principles Board Opinion No. 25, this deferred compensation will be amortized to expense
through the third quarter of 2005 as the options vest.
Stock-based compensation arrangements to nonemployees are accounted for in accordance with SFAS 123,
“Accounting for Stock-Based Compensation,” and EITF No. 96-18, “Accounting for Equity Instruments that Are
Issued to Others than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” using a fair
value approach. The compensation costs of these arrangements are subject to remeasurement over the vesting
terms as earned.
In 2002, Messrs. Wood, Kalinske and Rioux entered into new employment agreements providing for,
among other things, acceleration of vesting and extension of the exercise period of their stock options upon the
termination of their employment by LeapFrog without cause or by the employee for good reason (as defined in
the agreements) or a change in control of LeapFrog during the term of the applicable agreement. Under
applicable accounting principles, upon any termination of employment or change in control resulting in such
acceleration or extension, we would be required to recognize compensation expense. The amount of any such
compensation expense would depend on the number of option shares affected by the acceleration or extension
and could be material to our financial results.
Prior to our initial public offering, we granted stock appreciation rights under our Amended and Restated
Employee Equity Participation Plan that are measured at each period end against the fair value of the Class A
common stock at that time. The resulting difference between periods is recognized as expense at each period-end
measurement date based on the vesting of the rights.
In February 2002, we converted 337,500 stock appreciation rights into options to purchase an aggregate of
337,500 shares of Class A common stock. Deferred compensation of $0.9 million related to the unvested portion
will be amortized to expense through the third quarter of 2005 as the options vest.
On July 25, 2002, we converted 1,585,580 stock appreciation rights into options to purchase an aggregate of
1,585,580 shares of Class A common stock. The expense related to the conversion of the vested stock
appreciation rights was $1.5 million through July 2002 based on vested rights with respect to 192,361 shares of
Class A common stock outstanding as of July 25, 2002 at our initial public offering price of $13.00 per share.
Our deferred compensation expense in connection with the conversion of 1,310,594 unvested stock appreciation
rights held by employees converted to options to purchase 1,310,594 shares of Class A common stock, was $4.0
million. In accordance with generally accepted accounting principles, beginning in the third quarter of 2002 and
for the following 16 quarters, we will recognize this expense over the remaining vesting period of the options
into which the unvested rights are converted. Deferred compensation related to the unvested portion will be
amortized to expense as the options vest. To the extent any of the unvested options are forfeited, our actual
expense recognized could be lower than currently anticipated. Concurrently with our initial public offering, we
stopped granting stock appreciation rights under the Employee Equity Participation Plan.
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