LeapFrog 2007 Annual Report Download - page 128

will be reset such that those options will vest upon the 12-month anniversary of the closing date of the exchange
offer. The ratio of shares underlying exchanged options to shares underlying New Options will vary based on the
relative market value of the exchanged options to the New Options as we intend for the fair value of the New
Options to be equal to the fair value of the Eligible Options surrendered based on valuation assumptions made as
of the close of the Option Exchange Program, which we believe should result in no adverse impact on our
reported earnings.
We believe that, if approved by the stockholders, the Option Exchange Program will permit us to:
• enhance long-term stockholder value by restoring competitive incentives to the participants so they are
further motivated to complete and deliver the important strategic and operational initiatives we began
implementing in late 2006, as exercise prices significantly in excess of market price undermine the
effectiveness of options as employee performance and retention incentives; and
• reduce potential overhang, which is the number of shares issuable upon the vesting and exercise of
outstanding stock options and other stock awards, by reducing the total number of outstanding stock
options.
Under the listing rules of the NYSE, stockholder approval is required in order for us to implement the
Option Exchange Program and to issue New Options to our CEO in exchange for the Inducement Grants.
Stockholders should recognize that approval of the Option Exchange Program also includes approval of the
issuance of these New Options to our CEO. If our stockholders approve this proposal, our board of directors
intends to close the exchange offer promptly following the annual meeting. If we do not obtain stockholder
approval of this proposal, we will not be able to implement the Option Exchange Program. This proposal must
receive a “FOR” vote from the holders of a majority of votes cast either in person or by proxy on the proposal,
and the total votes cast on the proposal must represent over 50% of the votes of holders entitled to vote at the
annual meeting. If you “ABSTAIN” from voting, it will have the same effect as an “AGAINST” vote. Broker
non-votes will have no effect.
Our board of directors unanimously recommends a vote “FOR” this proposal.
Reasons for the Option Exchange Program
We believe that an effective and competitive employee incentive program is imperative for the future
growth and success of our business. We rely on highly skilled and educated technical and managerial employees
to implement our strategic initiatives, expand and develop our business, and satisfy customer needs. Competition
for these types of employees, particularly in the San Francisco Bay Area, is intense, and many companies use
stock options as a means of attracting, motivating and retaining their best employees. At LeapFrog, stock options
constitute a key part of our incentive and retention programs because our board of directors believes that equity
compensation encourages employees to act like owners of the business, motivating them to work toward our
success and rewarding their contributions by allowing them to benefit from increases in the value of our shares.
In addition, since late 2006, we have been implementing a multi-year turnaround plan with a new business
strategy that was designed to return LeapFrog to growth and profitability over the long-term, but would require
near-term actions that would not necessarily result in near-term increases in our stock price or improvements in
our operating results.
Many of our employees now hold stock options with exercise prices significantly higher than the current
market price of our Class A common stock. For example, on April 8, 2008, the closing price of our Class A
common stock on the NYSE was $7.43 per share and the weighted average exercise price of Eligible Options
was $12.76. Consequently, as of April 8, 2008, approximately 7.0 million shares of outstanding stock options
held by Eligible Participants were “underwater,” meaning that the exercise price of the outstanding stock option
was less than the market price for our stock. Although we continue to believe that stock options are an important
component of our employees’ total compensation, many of our employees view their existing options as having
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