LeapFrog 2015 Annual Report Download - page 128

PROPOSAL FOUR
AMENDMENT TO THE LEAPFROG ENTERPRISES, INC. 2011 EQUITY AND INCENTIVE PLAN
On May 26, 2015, the board of directors adopted, subject to stockholder approval, an amendment to the
LeapFrog Enterprises, Inc. 2011 Equity and Incentive Plan, or the 2011 EIP. The amendment to the 2011 EIP
makes the following changes:
• Increases the number of shares of Class A common stock reserved for issuance under the 2011 EIP
by 3.5 million shares so that we have a total of approximately 6.9 million shares available to grant
(assuming our current availability of 3.4m as of (5/31/2015).
• Decreases the number of returning shares eligible to be included in the share reserve of the 2011
EIP by 2,148,809 shares. These shares correspond to shares which, at the time of the approval of the
most recent amendment to the 2011 EIP, were subject to outstanding awards under the 2002 Equity
Incentive Plan, or the Prior Plan, and were eligible to be added to the share reserve of the 2011 EIP,
but which awards have since been exercised.
We are asking our stockholders to approve the amendments to the 2011 EIP. In addition, we are asking
our stockholders to approve the material terms of the 2011 EIP to satisfy the stockholder approval
requirements of Section 162(m) of the Internal Revenue Code (‘‘Section 162(m)’’). In general, Section 162(m)
places a limit on the deductibility for federal income tax purposes of the compensation paid to our Chief
Executive Officer and any of our three other most highly compensated executive officers (other than our Chief
Financial Officer). Under Section 162(m), compensation paid to such persons in excess of $1 million in a
taxable year generally is not deductible. However, compensation that qualifies as ‘‘performance-based’’ under
Section 162(m) does not count against the $1 million deduction limitation. We grant awards intended to
be ‘‘performance-based’’ to our executive officers under the 2011 EIP. One of the requirements of
‘‘performance-based’’ compensation (other than stock options and stock appreciation rights) for purposes of
Section 162(m) is that the material terms of the plan under which compensation may be paid be disclosed to
and approved by our stockholders every five years. The material terms of the 2011 EIP are discussed below,
and stockholder approval of this Proposal Four is intended to be deemed to constitute approval of the material
terms of the 2011 EIP for purposes of the stockholder approval requirements of Section 162(m). If the
stockholders approve the amended 2011 EIP, stockholder re-approval of the material terms of the 2011 EIP
will not be required again under Section 162(m) until 2020. Obtaining stockholder approval is only one of
several conditions that must be satisfied for awards under the 2011 EIP to qualify as performance-based
compensation, and the rules and regulations promulgated under Section 162(m) are complicated and subject to
change from time to time. Accordingly, it is possible that awards intended to qualify as performance-based
compensation could be determined by the Internal Revenue Service not to so qualify. In addition, we may
choose to provide awards under the 2011 EIP that are not intended to qualify as performance-based
compensation.
BACKGROUND
Equity Compensation Philosophy at LeapFrog
We believe that equity incentive awards are an effective way to attract and retain talented employees, to
motivate and reward them for outstanding company and individual performance, and to align their interests
with those of our stockholders. Having sufficient shares available under the 2011 EIP is critical to our ongoing
effort to build stockholder value through retaining and motivating such employees. Like all technology
companies, we actively compete for highly qualified employees and equity is an important element of
compensation in the industry. As a growth-oriented, entrepreneurial company, equity awards are a critical
component of our compensation program because they deliver high potential value with a smaller impact on
current income and cash flow. In addition, we believe equity awards provide a strong incentive for individuals
to work to grow our business and build stockholder value, and are attractive to individuals who share our
entrepreneurial spirit. For a discussion of our executive compensation philosophy, see ‘‘Executive
Compensation — Compensation Discussion and Analysis.’’
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