LeapFrog 2007 Annual Report Download - page 131

Outstanding Options Eligible for the Option Exchange Program. To be eligible for exchange under the
Option Exchange Program, an option must have an exercise price that is greater than the higher of $7.50 or the
Adjusted Market Price. Certain options that were granted to our employees, including our executive officers,
with above-market exercise prices must meet additional eligibility requirements as described in the section below
entitled “Tiered Options.” As of April 8, 2008, options to purchase approximately 9.0 million shares of our
Class A common stock were outstanding, of which options to purchase approximately 7.0 million shares, would
be eligible for exchange under the Option Exchange Program.
Eligibility. The Option Exchange Program will be open to all of our domestic employees, including our
executive officers, certain of our foreign employees and members of our board of directors who hold Eligible
Options. We may exclude employees located outside of the United States from the Option Exchange Program if,
for any reason, we believe that their participation would be inadvisable or impractical. To be eligible, an
employee must be employed by us and a director must be serving on our board of directors at the time the Offer
to Exchange commences. Additionally, in order to receive the New Options, an Eligible Participant who
surrenders his or her Eligible Options for exchange must be an employee or serving on our board of directors on
the date the New Options are granted. As of April 8, 2008, approximately 170 employees and seven
non-employee directors held Eligible Options.
Exchange Ratios. Exchange ratios will be designed to result in a fair value, for accounting purposes, of the
New Options that will 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. These ratios will be designed to make the
grant of New Options accounting expense neutral. In the proposed exchange offer, Eligible Participants would be
offered a one-time opportunity to exchange their Eligible Options for New Options covering a smaller number of
shares. The actual number of shares subject to New Options will be determined in accordance with exchange
ratios calculated by our independent compensation consultant using the Black-Scholes option valuation model
and based upon our stock price at the closing of the Offer to Exchange.
The following table shows (a) the number of shares underlying outstanding Eligible Options in each
exercise price range as of April 8, 2008 and (b) a hypothetical example of the exchange ratios that could be
applied to calculate the number of shares subject to New Options to be granted in exchange for surrendered
Eligible Options. The exchange ratios set forth in the table were calculated based on the assumption that the
exercise price of the New Options is $7.50 per share, the market price of our Class A common stock is $7.00 per
share and using exchange ratios that result in the fair value of the New Options being equal to the fair value of
the Eligible Options surrendered based on valuation assumptions made as of the close of the Option Exchange
Program. If the Option Exchange Program is approved, the actual exchange ratios used should result in (1) the
issuance of fewer shares subject to the New Options than were subject to the cancelled Eligible Options tendered
in the exchange offer and (2) the fair value, for accounting purposes, of Eligible Options surrendered being equal
to the fair value of the New Options replacing them.
Exercise Price Range
Maximum
Number of Shares
Underlying
Eligible Options
Weighted
Average Exercise
Price
Weighted
Average
Remaining Life
(in years)
Hypothetical
Weighted Average
Exchange
Ratio (Shares
Underlying
Eligible Options to
Shares Underlying
New Options)
Based on Specified
Assumptions
Hypothetical
Number of Shares
Underlying
New Options that
May be Granted
Based on Specified
Assumptions
$ 7.51 - $ 9.99 971,050 $ 9.15 8.71 1.25 to 1 779,238
$10.00 - $10.49 1,738,668 $10.25 8.01 1.48 to 1 1,177,526
$10.50 - $12.49 1,514,822 $11.64 7.80 1.67 to 1 906,690
$12.50 - $14.99 1,374,387 $13.27 7.49 1.82 to 1 757,080
$15.00 and above 1,404,753 $19.07 7.37 2.42 to 1 580,361
Total 7,003,680 $12.76 7.83 1.67 to 1 4,200,895
13