LeapFrog 2008 Annual Report Download - page 144

four anniversaries of the vesting commencement date. However, as discussed above, the compensation
committee did not grant RSUs to our named executive officers in the 2008 annual grant process.
Stock Option Exchange Program. In early 2008, the compensation committee reviewed our use of equity
incentives and noted that a large number of issued stock options were no longer serving as effective incentive or
retention tools, yet were being recorded as compensation expense by us and contributing to our potential
employee equity overhang. In February 2008, the compensation committee recommended to the full board, and
the board subsequently approved, a stock option exchange program, under which our directors and employees
would be offered the opportunity to exchange eligible out-of-the-money stock options for new options having an
exercise price per share equal to the higher of (a) $7.50 per share or (b) $0.25 above the closing price of our
Class A common stock as reported on the NYSE for the business day prior to the date the new options were
granted (the “Exchange Price”). Under the program, outstanding stock options with an exercise price greater than
the Exchange Price were eligible to participate. The new options issued in the exchange program covered fewer
shares at a lower exercise price than the options surrendered for cancellation. The exchange ratio was set to result
in the same fair value for the new options as for the options surrendered for cancellation so the exchange had
only a very minor impact on our income statement.
The compensation committee concluded that our executive officers should be eligible to participate in the
option exchange program to provide them with improved incentives to increase stockholder value, increase the
retention value of outstanding options and reduce the total number of potential shares directed towards employee
incentive programs—all at virtually no expected additional compensation expense to the company for accounting
purposes. Many of our senior executives, including all of our named executive officers, were previously granted
“tiered” options to purchase shares of our stock at then fair market value as well as at strike prices that were
approximately 133% and 166% of then fair market value. Those who elected to surrender tiered options in the
program received in exchange option grants with a similar tier structure with the result that the new options
would include the same proportions of out-of-the-money strike prices as the surrendered options.
The stock option exchange program was approved by stockholders on June 5, 2008 and the exercise price of
the replacement options was set at $9.14, $0.25 above the closing price of our Class A common stock as reported
on the NYSE for the business day prior to the date the new options were granted on June 9, 2008.
A total of 103 employees participated in the option exchange program, including three of our named
executive officers: Messrs. Katz and Chiasson and Ms. MacIntyre. Mr. Katz exchanged options to purchase
2,681,250 shares with exercise prices ranging from $10.30—$16.67 for options to purchase 2,237,312 shares
with exercise prices ranging from $9.14—$14.79. Mr. Chiasson exchanged options to purchase 382,000 shares
with exercise prices ranging from $9.33—$15.49 for options to purchase 288,264 shares with exercise prices
ranging from $9.14—$15.17. Ms. MacIntyre exchanged options to purchase 100,000 shares with exercise prices
ranging from $10.39—$17.25 for options to purchase 84,780 shares with exercise prices ranging from $9.14—
$15.17.
Severance Benefits
In 2007, the compensation committee approved our Executive Management Severance and
Change-in-Control Plan, or Severance Plan. All of our named executive officers may receive benefits under the
Severance Plan, with the exceptions of Mr. Katz, who is not eligible to participate in these plans and instead is
eligible to receive benefits under the severance and change-in-control provisions that are part of his employment
agreement.
Prior to the approval of these plans, our executive officers frequently had individually negotiated severance
agreements. The plans were developed to achieve three objectives: (1) to minimize distraction and risk of
departure of executives and senior management in the event of a potential change-in-control transaction
involving LeapFrog; (2) to provide consistency in benefits among our executive officers and senior management;
and (3) to align our severance benefits for executives and senior management with competitive practice. In
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