LeapFrog 2004 Annual Report Download - page 138

Mr. Kalinske was appointed our Chief Executive Officer in February 2004. In April 2004, the
Compensation Committee completed its review and approved his compensation package to be effective
retroactively to February 10, 2004, the day he became the Chief Executive Officer of LeapFrog. Pursuant to his
employment agreement, Mr. Kalinske receives an annual salary of $495,000, and an annual bonus opportunity of
100% of his annual base salary, which includes a guaranteed annual bonus payment of $67,500 as part of the
entire opportunity. The salary and the target total cash opportunity were established to be at the median of the
competitive survey data and in line with the peer group.
In 2004, Mr. Kalinske did not receive the non-guaranteed portion of his annual bonus opportunity, and he
waived the right to the $67,500 guaranteed portion of his bonus.
In April 2004, the Compensation Committee also approved an equity award to Mr. Kalinske consisting of
(1) a non-qualified option to purchase 190,000 shares of LeapFrog common stock at $22.25 per share, the then
fair market value of our class A common stock, vesting at the rate of 1/48th of the option per month for four
years, and (2) a grant of 95,600 performance shares under the 2004-2006 plan cycle. In line with the practice for
the other executives, Mr. Kalinske’s grants were comprised of an annual performance-based grant sized at the
median of the competitive survey data, plus an additional transition grant equal in size to the performance-based
grant intended to transition from the prior occasional grant approach. The resulting aggregate grant was thus two
times median competitive levels for ongoing grants, but determined to be appropriate in light of Mr. Kalinske’s
assumption of the Chief Executive Officer role and the two year timeframe since the award of his previous equity
grant. For the performance shares, LeapFrog did not meet its threshold goals for 2004 on the three annual
measures of net income, revenue and operating cash flow (adjusted for current accounts receivable) and thus the
portion of performance shares attributable to calendar year 2004 of the three year performance cycle was not
earned by Mr. Kalinske.
While serving as our Chief Executive Officer in 2004, Mr. Wood received an annual base salary of
$281,200, and he was eligible to receive an annual incentive bonus of $135,000, of which one-half of the bonus
was guaranteed and the remaining 50% was based on LeapFrog’s performance. Due to Mr. Wood’s significant
equity holdings in LeapFrog that were granted to him as founder of the company, he received a relatively modest
annual base salary and bonus opportunity.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code (the “Code”) generally disallows a tax deduction to publicly-
held companies for compensation exceeding $1.0 million paid to certain of a company’s executive officers. The
limitation applies only to compensation that is not considered to be performance-based.
LeapFrog received stockholder approval in June 2004 to amend the 2002 Equity Incentive Plan to include
certain provisions that will allow the company to qualify performance share grants as “performance-based”
compensation under Section 162. In addition, grants of stock options will qualify, provided that such grants have
exercise prices of no less than 100% of fair market value on the date of grant and do not exceed a calendar year
limit for the executive officer that is set forth in the 2002 Equity Incentive Plan.
LeapFrog generally intends to grant stock options and performance shares to its executives in a manner that
satisfies the requirements for qualified performance-based compensation to avoid any disallowance of deductions
under Section 162(m).
While total cash compensation for our executives did not exceed $1.0 million for any individual executive,
the Compensation Committee believes it is appropriate for the company to retain the flexibility to pay actual total
cash compensation above $1.0 million if warranted based upon exceptional company and individual
performance, and thus from time to time the company may pay compensation to executives that is not deductible,
including grants of time-based restricted stock.
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