LeapFrog 2007 Annual Report Download - page 127

PROPOSAL TWO
APPROVAL OF THE OPTION EXCHANGE PROGRAM
Introduction
We are seeking stockholder approval of an Option Exchange Program (defined below) that would allow us
to cancel out-of-the-money stock options currently held by some of our employees and directors in exchange
for the issuance of a lesser amount of stock options with lower exercise prices. We are proposing this program
because we believe that, by essentially re-purposing already issued equity awards but with certain extended
vesting terms, we will more cost-effectively provide retention and incentive tools to our key contributors rather
than simply issuing incremental equity or paying additional cash compensation. This program is designed to
result in no adverse impact to our reported earnings. Assuming full participation and an exercise price for the
new options at $7.50 per share, the program would result in a net reduction of approximately 2.8 million
outstanding stock options.
Overview
On February 28, 2008, the compensation committee recommended to our board of directors, and in March
2008 our board subsequently authorized, a one-time stock option exchange program (the “Option Exchange
Program”), subject to stockholder approval. Under the proposed Option Exchange Program, eligible employees,
including executive officers, and members of our board of directors would be able to elect to exchange
outstanding eligible options to purchase shares of our Class A common stock for new stock options with a lower
exercise price but covering fewer shares (the “New Options”). Stock options will be eligible for the program
(“Eligible Options”) if they have exercise prices per share greater than the higher of (a) $7.50 or (b) $0.25 above
the closing price of our Class A common stock as reported on the New York Stock Exchange (the “NYSE”) for
the business day prior to the date on which we close the exchange offer (the “Adjusted Market Price”). The
opportunity to participate in the option exchange will be offered to all of our domestic employees, certain of our
foreign employees and members of our board of directors (collectively referred to as the “Eligible Participants”)
who hold Eligible Options that were granted under either our 2002 Equity Incentive Plan or 2002 Non-Employee
Directors’ Stock Award Plan (collectively referred to as the “Plans”). Eligible Options surrendered for exchange
under the Option Exchange Program that were issued under the Plans will, upon the closing of the exchange
offer, be exchanged for New Options granted pursuant to our 2002 Equity Incentive Plan.
Under the proposed Option Exchange Program, our Chief Executive Officer (CEO) will also be offered the
opportunity to exchange his Eligible Options. Our CEO’s Eligible Options include 2.65 million option shares
granted to him upon his joining LeapFrog as President and CEO. Of these new hire option shares, 2.0 million
were granted to him under the 2002 Equity Incentive Plan, and the remaining 650,000 option shares were granted
to him as two special inducement grants awarded to him outside of any formal plan pursuant to NYSE listing
rules (the “Inducement Grants”). Any New Options issued to our CEO in exchange for his Inducement Grants
will likewise be issued outside of a formal equity plan but will have terms similar to the terms of nonstatutory
option grants issued under our 2002 Equity Incentive Plan. Information about the Inducement Grants and
potential New Options to be issued in exchange for the Inducement Grants is presented, for purposes of
illustration based on specified assumptions, in the table captioned “Interests of Our Directors and Executive
Officers in the Option Exchange Program” at the end of this proposal. We are required, under the listing rules of
the NYSE, to obtain stockholder approval of the grant of New Options in exchange for the Inducement Grants.
Accordingly, approval of the Option Exchange Program in this Proposal Two also includes approval of the New
Options to be granted to our CEO in exchange for his surrendered Inducement Grants.
Under the proposed Option Exchange Program, each New Option will have: (1) an exercise price per share
equal to the higher of $7.50 or the Adjusted Market Price, (2) the same expiration date as the tendered Eligible
Option and (3) the same vesting schedule as the tendered Eligible Option, except that the vesting schedules for
any options that are already vested or that will vest within 12 months of the closing date of the exchange offer
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