LeapFrog 2007 Annual Report Download - page 130

expected adverse impact on our reported earnings, together with a new 12-month minimum vesting
requirement, represents a reasonable and balanced exchange program with the potential for a
significant positive impact on employee retention, motivation and performance.
•Reduction of the Number of Shares Subject to Outstanding Options. Not only do the underwater options
have little or no retention value, they cannot be removed from our stock option overhang until they are
exercised or expire unexercised. If approved by the stockholders, the Option Exchange Program will
reduce our overhang of outstanding stock options by eliminating the ineffective options that are currently
outstanding. Under the proposed Option Exchange Program, Eligible Participants will receive stock
options covering fewer shares than the options surrendered. As a result, the number of shares subject to all
outstanding equity awards will be reduced, thereby reducing the overhang. If the tender offer were to
close at a time when the market price of our Class A common stock is $7.00 per share, the exercise price
of the New Options is $7.50 per share, and if all Eligible Options were exchanged, based on the number
of Eligible Options outstanding on April 8, 2008, options to purchase approximately 7.0 million shares
would be surrendered and cancelled, while New Options covering approximately 4.2 million shares
would be issued, resulting in a net reduction in the overhang of our outstanding stock options of
approximately 2.8 million shares, or approximately 7.8% of the number of shares of our Class A common
stock outstanding as of April 8, 2008.The actual reduction in our overhang that could result from the
Option Exchange Program could vary significantly and is dependent upon a number of factors, including
the actual level of participation in the Option Exchange Program. The reduction in overhang may also be
partially offset by the grant of additional awards under our Plans. All Eligible Options that are not
exchanged will remain outstanding and in effect in accordance with their existing terms.
•Reduced Pressure for Additional Grants. If we are unable to implement the Option Exchange
Program, we may be forced to issue additional options to our employees at current market prices,
increasing our overhang. These grants would more quickly exhaust the current pool of options
available for future grants under the Plans and would also result in decreased reported earnings, which
could negatively impact our stock price.
•Participation by Our Executive Officers and Our Board of Directors. The members of our board of
directors and our executive officers work closely as a team and are expected to be among the primary
drivers of the strategic and operational initiatives begun in late 2006 to advance the creation of long-term
stockholder value. As a result, the retention and motivation of our directors and executives officers are
critical to LeapFrog’s long-term success. Accordingly, we have elected to include executive officers and
members of our board of directors as Eligible Participants in the Option Exchange Program.
Description of the Option Exchange Program
Implementing the Option Exchange Program. If the Option Exchange Program is approved by the
stockholders, it is the board of directors’ intent that Eligible Participants who were offered the opportunity to
participate in the program under a tender offer (an “Offer to Exchange”) filed with the Securities and Exchange
Commission (the “SEC”) will be able to complete their exchange promptly following the annual meeting. From the
time the Offer to Exchange commences, the Eligible Participants will be given at least 20 business days to make an
election to surrender for cancellation all or a portion of their Eligible Options on a grant-by-grant basis in exchange
for New Options. Eligible Participants who hold single grants of options to purchase 100,000 shares or more may
elect to exchange all or a portion of these large grants. The New Options will be issued promptly following the
closing of the Offer to Exchange, which we expect will be on or about June 6, 2008. Even if the Option Exchange
Program is approved by our stockholders, our board will retain the authority, in its sole discretion, to terminate or
postpone the program, at any time prior to the closing of the Offer to Exchange or to exclude certain Eligible
Options or Eligible Participants from participating in the Option Exchange Program due to tax, regulatory or
accounting reasons or because participation would be inadvisable or impractical. Stockholder approval of the
Option Exchange Program applies only to this exchange program. If we were to implement a stock option exchange
program in the future, we would once again need to seek stockholder approval.
12