LeapFrog 2015 Annual Report Download - page 129

Reduction in Number of Shares from Prior Plan Eligible for Inclusion in 2011 EIP Share Reserve
When it was last amended in 2012, the share reserve of the 2011 EIP included up to 4,867,831 shares of
Class A common stock (the ‘‘Returning Shares’’) which were subject to outstanding stock awards granted
under the Prior Plan but were eligible to return to the 2011 EIP share reserve if such outstanding stock award
expired or terminated for any reason prior to exercise or settlement or if the shares were forfeited because of
the failure to meet a contingency or condition required to vest such shares or were reacquired or withheld by
the Company to satisfy a tax withholding obligation or as consideration for the exercise of an option. Since
the most recent amendment of the 2011 EIP, the number of shares subject to outstanding stock awards granted
under the Prior Plan decreased by 2,148,809 shares as the result of the forfeiture or exercise of outstanding
stock awards. These shares are no longer eligible to be included in the share reserve of the 2011 EIP as
Returning Shares. Consequently, we are removing these shares from the calculation of the share reserve.
Therefore, even though we are adding 3.5 million new shares, the overall share reserve is only increasing by
1,351,191 shares.
The Number of Shares Available for Grant under the 2011 EIP is Likely Insufficient for our Budgeting
Purposes
As of May 31, 2015, the 2011 EIP had approximately 3.4 million shares remaining available for grant.
Using projections provided by management, the compensation committee reviewed our projected share usage
and concluded, in the exercise of its business judgment, that the number of shares available for grant under
the 2011 EIP is likely insufficient for our budgeting purposes. In evaluating whether to recommend Proposal
Four to stockholders, the compensation committee considered a number of metrics as points of reference,
including the balance of shares available for grant, and our historic and projected grant rates, and measures of
potential cost and dilution, including burn rate and shareholder value transfer, or SVT.
Over the 12 month period beginning June 1, 2015, we project gross share usage will be approximately
3.4 million shares, which would include annual refresh grants at the beginning of our 2017 fiscal year. In
addition, our compensation committee has considered paying our employees all or a portion of bonuses for the
2016 fiscal year (‘‘Fiscal 2016’’) in equity instead of cash to further align employee compensation with stock
performance, which usage could be 3.5 million shares or higher. Thus, we may not currently have sufficient
shares to satisfy our compensation needs prior to the calendar 2016 annual meeting and believe it is prudent
to increase the share reserve at this time.
Gross share usage in Fiscal 2015 was 2.5 million shares and projected usage in Fiscal 2016 is 3.4 million
shares. Even though we currently project that gross share usage will increase in Fiscal 2016, we intend to
manage our equity awards carefully, recognizing that equity awards dilute existing stockholders. The
compensation committee monitors our equity award use carefully to balance the goal of compensating,
motivating and retaining our employees against our stockholders’ interest in limiting dilution from equity
grants. In connection with that effort, the compensation committee considers in the exercise of its business
judgment historical share usage, adjusted gross burn rate and SVT, among other factors.
Our compensation committee was presented with information from its compensation consultant regarding
our historical burn rate, as compared to industry benchmarks used by Institutional Shareholder Services Inc.
(‘‘ISS’’), a proxy advisory service, and estimations of SVT as calculated by ISS. The compensation committee
considered, as a point of reference, factors and methodologies used by ISS in determining whether to
recommend approval of Proposal Four, and did so to help assess whether there will be broad shareholder
support for Proposal Four, a practice that is typical for many companies seeking stockholder approval of
amendments to equity plans.
Data relating to the SVT of our 2011 EIP was presented by our compensation consultant to the
compensation committee. SVT is one method of measuring the potential dilution of existing stockholders due
to the potential grant, vesting or exercise of equity awards. The SVT methodology assigns a dollar value to all
outstanding grants and available shares, which is then expressed as a percent of the market capitalization.
The compensation committee was informed that ISS will likely use the 200-day average share price of
our stock as of March 1, 2015, which was $5.63, in its calculation of SVT. Thus, ISS is likely to estimate
SVT associated with our outstanding awards to be 9.9% and the SVT associated with outstanding awards and
the total SVT with the increased share reserve to be 19.9%. Because of the decline in our share price during
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