LeapFrog 2006 Annual Report Download - page 116

While adding 3,000,000 shares to our 2002 Equity Incentive Plan will in the short term increase the
potential dilution represented by these plans and therefore increase our overhang, we believe it is necessary in
order to incentivize our current employees, since the underwater options are no longer fully effective as
performance and retention incentives. We believe that in order to enhance long-term stockholder value we need
to maintain competitive employee compensation and incentive programs. An equity stake in the success of the
company is a critical component of these programs. We believe an increase in the number of shares to our option
plan will enable us to recruit, retain and incentivize employees by offering them the opportunity to participate
economically in our future growth and success.
The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and
entitled to vote at the meeting will be required to approve this Proposal Two. Abstentions will be counted toward
the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative
votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
The essential features of the Equity Plan are outlined below:
The purpose of the Equity Plan is to enable LeapFrog to attract and retain talented employees, key
consultants and directors by providing an incentive to such individuals through equity participation in LeapFrog,
and by rewarding employees, key consultants and directors who contribute to the achievement of LeapFrog’s
long-term economic objectives.
The Equity Plan automatically will terminate ten years after its adoption, unless it is terminated earlier by
the board of directors.
Eligibility. The Equity Plan provides for the following types of stock awards to the following persons:
• Incentive stock options, as defined under the Internal Revenue Code of 1986, as amended (the “Code”),
which may be granted solely to employees (including officers); and
• Nonstatutory stock options, restricted stock awards, stock bonus awards, restricted stock unit awards
and stock appreciation rights, all of which may be granted to employees (including officers), directors
and consultants.
As of March 1, 2007, we had approximately 914 employees eligible to participate in the Equity Plan.
Administration. Pursuant to the terms of the Equity Plan, the board of directors has delegated
administration of the Equity Plan to the Compensation Committee of the board of directors (the “Committee”);
provided, however, that in the case of stock awards intended to qualify as “performance-based compensation”
within the meaning of Section 162(m) of the Code, or that are made to persons who are subject to Section 16 of
the Exchange Act, the Committee will consist, respectively, solely of two or more “outside directors” within the
meaning of Section 162(m) of the Code and solely of two or more “non-employee directors” within the meaning
of Section 16 of the Exchange Act. Subject to the terms of the Equity Plan, the Committee determines recipients,
the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including
the period of their exercisability and vesting. Subject to the limitations set forth below, the Committee will also
determine the exercise, purchase or strike price of each stock award. In granting a performance-based stock
award, the Committee will set a period of time (a Performance Period) which will generally be three years long,
over which the attainment of one or more goals (Performance Goals) will be measured for the purpose of
determining whether the award recipient has a vested right in or to such stock award. Within the time period
prescribed by Section 162(m) of the Code (typically before the 90th day of a Performance Period), the
Committee will establish the Performance Goals, based upon one or more pre-established criteria (Performance
Criteria) enumerated in the Equity Plan. As soon as administratively practicable following the end of the
Performance Period, the Committee will certify (in writing) whether the established Performance Goals have
9