LeapFrog 2009 Annual Report Download - page 78

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
In accordance with the Offer, except as described below for the Company’s CEO and members of the board of
directors, the number of shares subject to each new option grant was determined using an exchange ratio
designed to maintain approximately the same fair value, for accounting purposes, of the new option grant (at the
time of grant) as the fair value of the corresponding eligible option grants surrendered for exchange (at the time
immediately prior to cancellation). Accordingly, the Company granted new options to purchase an aggregate of
3,595 shares of Class A common stock in exchange for the cancellation of the tendered eligible options.
The exchange ratios were calculated using a Monte-Carlo simulation based on the closing price of the Class A
common stock as reported on the New York Stock Exchange (the “NYSE”) for the business day prior to the
expiration date of the Offer on August 26, 2009, which was $3.79 (the “Market Price”), as well as other valuation
assumptions such as expected term, volatility, risk-free interest rate, and probabilities of exercise and forfeiture.
The exercise price per share of the new options other than those granted to the CEO and directors was the Market
Price. In the case of any new option grants issued to the Company’s CEO and directors, while the exercise price
of such options was $6.25, the exchange ratio was determined using the Market Price to calculate the value of the
new option grants, with the result that these individuals received grants covering fewer shares than they would
have received had the value of the new option grants been calculated using $6.25. The exchange was designed to
result in no additional compensation expense.
During the second quarter of 2009, the Company made two stock option grants to certain management employees
and board members to purchase an aggregate of 2,705 shares of our Class A common stock that vest based upon
a service condition and a market condition. The fair value of stock options with a market condition is estimated
on the date of the grant using a Monte-Carlo simulation. The simulation generates a defined number of stock
price paths to develop a reasonable estimate of future expected stock price ranges based on vesting requirements
and the assumed exercise behavior of the grants. The model assumes options will be exercised uniformly over the
remaining life if and when the vesting and market conditions are met. All other assumptions are consistent with
option grants that vest solely upon a service condition.
On June 5, 2008, the stockholders of the Company approved a stock option exchange program, as described in
the Company’s definitive proxy statement for its 2008 Annual Meeting of Stockholders, filed with the SEC on
April 21, 2008. Under the option exchange program (“Program”) the Company offered to exchange, for new
lower-priced options, certain outstanding options previously granted under the Company’s Plans and under two
special inducement grants awarded to the Company’s Chief Executive Officer outside of the Company’s Plans
upon his joining the Company. Option holders eligible to participate in the Program tendered, and the Company
accepted for cancellation, eligible options to purchase an aggregate of 4,936 shares of the Company’s Class A
common stock, and issued stock options to purchase 3,669 shares of the Company’s Class A common stock in
exchange. In accordance with the terms of the Program, the number of shares subject to each new option grant
was determined using an exchange ratio designed to result in the fair value of the new option grant (at the time of
grant) being equal to the fair value of the eligible option grant tendered for exchange (at the time immediately
prior to cancellation of the eligible option). Accordingly, the Company did not incur any additional stock-based
compensation expense related to the Program.
The Company is authorized to issue up to a total of 24,000 shares of Class A common stock for any of the types
of awards authorized under the Plans. At December 31, 2009 the remaining available for future grants was 4,691
for stock-based awards and 1,403 for the ESPP.
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