LeapFrog 2010 Annual Report Download - page 74

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
holders eligible to participate in the Offer to exchange tendered, and the Company accepted for cancellation,
options to purchase an aggregate of 6,372 shares of the Company’s Class A common stock from 214 participants,
representing 96.5% of the total shares of Class A common stock underlying options eligible for exchange in the
Offer.
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 (“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 granted options to certain executives and board members to
purchase an aggregate of 2,705 shares of its Class A common stock that vest based upon a service condition and
a market condition. Based on the existence of the market condition requirement for vesting, the fair value of
these stock options was 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.
There were no stock options grants valued using a Monte-Carlo simulation during the fiscal year ended
December 31, 2010.
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 CEO 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.
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