LeapFrog Enterprises Inc NYSE: LF is an educational toy company based in Emeryville, California. LeapFrog designs, develops and markets technology-based learning products and related content for the education of infant through grade school children at home and in schools internationally.
The company was founded in 1995 by Michael Wood, a Stanford University, University of California, Berkeley, Haas School of Business (MBA, 1979) and University of California, Hastings College of the Law (JD) graduate, when he found no products on the market that could help his struggling son learn to read. Since then, LeapFrog has developed a number of learning platforms with a library of software titles, covering subjects including phonics, reading, writing, and math for grade school children.
We are seeking stockholder approval of an Option Exchange Program (defined below) that would allow us to cancel out-of-the-money stock options currently held by some of our employees and directors in exchange for the issuance of a lesser amount of stock options with lower exercise prices. We are proposing this program because we believe that, by essentially re-purposing already issued equity awards but with certain extended vesting terms, we will more cost-effectively provide retention and incentive tools to our key contributors rather than simply issuing incremental equity or paying additional cash compensation. This program is designed to result in no adverse impact to our reported earnings. Assuming full participation and an exercise price for the new options at $7.50 per share, the program would result in a net reduction of approximately 2.8 million outstanding stock options.
OPERATING PRINCIPLES
In fulfilling its function and responsibilities, the Committee should give due consideration to the following principles:
General - The operation of the Committee shall be subject to the Bylaws of the Company as in effect from time to time and Section 141 of the Delaware General Corporation Law.
Communication - Regular and meaningful contact throughout the year with the Chairman of the Board, senior management, other committee chairpersons and other key Committee advisors, as applicable, is viewed as important for strengthening the Committee's knowledge of sound compensation policies.
Committee Expectations and Information Needs - The Committee should communicate to the Chief Executive Officer and President or their designee the expectations of the Committee, and the nature, timing, and extent of any specific information or other supporting materials requested by the Committee, for its meetings and deliberations.
Resources - The Committee shall have full access to all books, records, facilities and personnel of the Company as deemed necessary or appropriate by any member of the Committee to discharge his or her responsibilities hereunder. The Committee shall have the authority to obtain, at the expense of the Company, advice and assistance from internal or external legal, accounting or other advisors and consultants. In addition, the Committee shall have sole authority to retain and terminate any compensation consultant to assist in the evaluation in the compensation of the chief executive officer or other executive officers compensation and in the performance of any of the Committee’s other duties under this Charter, including sole authority to approve such consultant's fees and other retention terms, all at the Company's expense. Other reasonable expenditures for external resources that the Committee deems necessary or appropriate in the performance of its duties are permitted.
Delegation Authority - The Committee shall have the authority, in its discretion, subject to applicable laws, regulations and stock exchange listing standards, to form and delegate authority to committees or subcommittees as appropriate, including, but not limited to, a subcommittee or a committee composed of one or more members of the Board to grant stock awards under the Company's equity incentive plans to persons who are not (a) "Covered Employees" under Section 162(m) of the Code; (b) individuals with respect to whom the Company wishes to comply with Section 162(m) of the Code or (c) then subject to Section 16 of the Exchange Act.
Meeting Agendas - Committee meeting agendas shall be the responsibility of the Committee chairperson with input from Committee members and other members of the Board, with additional input from members of senior management and outside advisors to the extent deemed appropriate by the chairperson.
Committee Meeting Attendees - The Committee shall be authorized to request members of senior management, outside counsel and other advisors to participate in Committee meetings.
Minutes - Minutes of each meeting will be kept and distributed to each member of the Committee, members of the Board who are not members of the Committee upon request and the Secretary of the Company.
Reporting to the Board of Directors - The Committee, through the Committee chairperson, shall report all material activities of the Committee to the Board from time to time, or whenever so requested by the Board
In addition, two of our directors, Philip B. Simon and Paul T. Marinelli, are President and Vice President, respectively, of Lawrence Investments, LLC, an entity also controlled by Mr. Ellison.
Mr. Ellison could have interests that diverge from those of our other stockholders. This control by Mr. Ellison could depress the market price of our Class A common stock; deter, delay or prevent a change in control of LeapFrog; or affect other significant corporate transactions that otherwise might be viewed as beneficial for other stockholders.
Our stock price has been extremely volatile over the past several years and could decline in the future, resulting in losses for our investors and harming the employee-retention and recruiting value of our equity compensation.
All the factors discussed in this section could affect our stock price. The timing of announcements in the public markets regarding new products, product enhancements or product recalls by us or our competitors, or any other material announcements could affect our stock price. Speculation in the media and analyst communities, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock and market trends unrelated to our stock can cause the price of our stock to change. A significant drop in the price of our stock could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting our business.
Our future success depends partly on the continued contribution of our key executives and technical, sales, marketing, manufacturing and administrative personnel. Part of our compensation package includes stock and/or stock options. To the extent our stock performs poorly, it may adversely affect our ability to retain or attract key employees, potentially resulting in lost institutional knowledge and key talent. Changes in compensation packages or costs could impact our profitability and/or our ability to attract and retain sufficient qualified personnel.
Intellectual Property and Piracy
Intellectual property (IP) can be defined as a product that has commercial value but is physically intangible, such as music,
books and movies.
Computer software is a form of IP – Microsoft can write code, create the software application, put it on a CD, and distribute it so
that millions of people can use it at the same time, but the CD is not the work; the software itself is.
While IP is intangible (i.e. you can’t physically touch it because it is not a material item), in this modern information age IP carries
as much, if not more, monetary value than material possessions.
As a result, IP and copyright laws have been put into place both to recognise that it not only retains value but to prevent copying
or distribution against the will of the creator.
Software piracy is effectively the unauthorised copying or distribution of copyrighted software – essentially stealing the IP
within the software. It can take the form of hard-disk loading (loading unlicensed copies of software onto multiple computers
without paying for it); simple copies (fake software typically burned onto an unbranded CD or DVD, with no accompanying
documentation or certificates of authenticity to prove that they are genuine); and counterfeits (fake software typically shipped on
an official-looking CD or DVD, in packaging that appears to look original).
Protecting your Assets
As a business owner, genuine licensed software is an asset and investment and should be managed as such. Also as a business
owner, software piracy, even when committed unknowingly by a member of your staff, is your problem.
Aside from the risk of being caught and facing possible criminal and civil legal sanctions, as well as the risk to your business’s
reputation, a business running pirated software on their PCs can fall prey to malware, viruses, security breaches and network
downtime. This is because unlicensed software is often installed by resellers or IT staff using hacked Product Keys that are
generated by key generating tools, or counterfeit CDs that contain serious security vulnerabilities.
Software companies support their finished products and provide updates and fixes for genuine licensed software to help keep
it functioning properly. When the software is not a genuine product, it is usually not eligible to receive manufacturer’s technical
support, virus protection, warranty information, or any other software updates.
By using genuine licensed software, you not only help protect the creators of the software and the software itself, you ultimately
protect the interests of your own business.
However, with so many things on a business owner’s plate to manage from staff to operations, keeping track of software
licensing requirements can be a big challenge.
This is where Software Asset Management (SAM) comes in to play.
How Software Asset Management Can Help
Software Asset Management (SAM) is a best practice incorporating a set of proven processes and procedures for managing
your business’s IT assets and ensuring they operate at maximum efficiency.
Effective business management means identifying the risks facing your business, and controlling and mitigating those risks
before they can have an impact. Implementing SAM can help you identify what you have, where it’s running, and if your business
is using your assets efficiently.
A SAM program will give you as a business owner a better understanding of what types of licenses and how many your company
has purchased and deployed; what you are actually using and therefore what you need.
You also have added peace of mind by ensuring your software is genuine and not pirated. This provides an extra layer of security
and efficiency that pirated software cannot.
With a good SAM plan in place, you are effectively protecting your business and your staff from the threat of piracy, while
ensuring you get the best bang for your buck from the genuine licensed software you have invested in.
The company was founded in 1995 by Michael Wood, a Stanford University, University of California, Berkeley, Haas School of Business (MBA, 1979) and University of California, Hastings College of the Law (JD) graduate, when he found no products on the market that could help his struggling son learn to read. Since then, LeapFrog has developed a number of learning platforms with a library of software titles, covering subjects including phonics, reading, writing, and math for grade school children.
We are seeking stockholder approval of an Option Exchange Program (defined below) that would allow us to cancel out-of-the-money stock options currently held by some of our employees and directors in exchange for the issuance of a lesser amount of stock options with lower exercise prices. We are proposing this program because we believe that, by essentially re-purposing already issued equity awards but with certain extended vesting terms, we will more cost-effectively provide retention and incentive tools to our key contributors rather than simply issuing incremental equity or paying additional cash compensation. This program is designed to result in no adverse impact to our reported earnings. Assuming full participation and an exercise price for the new options at $7.50 per share, the program would result in a net reduction of approximately 2.8 million outstanding stock options.
OPERATING PRINCIPLES
In fulfilling its function and responsibilities, the Committee should give due consideration to the following principles:
General - The operation of the Committee shall be subject to the Bylaws of the Company as in effect from time to time and Section 141 of the Delaware General Corporation Law.
Communication - Regular and meaningful contact throughout the year with the Chairman of the Board, senior management, other committee chairpersons and other key Committee advisors, as applicable, is viewed as important for strengthening the Committee's knowledge of sound compensation policies.
Committee Expectations and Information Needs - The Committee should communicate to the Chief Executive Officer and President or their designee the expectations of the Committee, and the nature, timing, and extent of any specific information or other supporting materials requested by the Committee, for its meetings and deliberations.
Resources - The Committee shall have full access to all books, records, facilities and personnel of the Company as deemed necessary or appropriate by any member of the Committee to discharge his or her responsibilities hereunder. The Committee shall have the authority to obtain, at the expense of the Company, advice and assistance from internal or external legal, accounting or other advisors and consultants. In addition, the Committee shall have sole authority to retain and terminate any compensation consultant to assist in the evaluation in the compensation of the chief executive officer or other executive officers compensation and in the performance of any of the Committee’s other duties under this Charter, including sole authority to approve such consultant's fees and other retention terms, all at the Company's expense. Other reasonable expenditures for external resources that the Committee deems necessary or appropriate in the performance of its duties are permitted.
Delegation Authority - The Committee shall have the authority, in its discretion, subject to applicable laws, regulations and stock exchange listing standards, to form and delegate authority to committees or subcommittees as appropriate, including, but not limited to, a subcommittee or a committee composed of one or more members of the Board to grant stock awards under the Company's equity incentive plans to persons who are not (a) "Covered Employees" under Section 162(m) of the Code; (b) individuals with respect to whom the Company wishes to comply with Section 162(m) of the Code or (c) then subject to Section 16 of the Exchange Act.
Meeting Agendas - Committee meeting agendas shall be the responsibility of the Committee chairperson with input from Committee members and other members of the Board, with additional input from members of senior management and outside advisors to the extent deemed appropriate by the chairperson.
Committee Meeting Attendees - The Committee shall be authorized to request members of senior management, outside counsel and other advisors to participate in Committee meetings.
Minutes - Minutes of each meeting will be kept and distributed to each member of the Committee, members of the Board who are not members of the Committee upon request and the Secretary of the Company.
Reporting to the Board of Directors - The Committee, through the Committee chairperson, shall report all material activities of the Committee to the Board from time to time, or whenever so requested by the Board
In addition, two of our directors, Philip B. Simon and Paul T. Marinelli, are President and Vice President, respectively, of Lawrence Investments, LLC, an entity also controlled by Mr. Ellison.
Mr. Ellison could have interests that diverge from those of our other stockholders. This control by Mr. Ellison could depress the market price of our Class A common stock; deter, delay or prevent a change in control of LeapFrog; or affect other significant corporate transactions that otherwise might be viewed as beneficial for other stockholders.
Our stock price has been extremely volatile over the past several years and could decline in the future, resulting in losses for our investors and harming the employee-retention and recruiting value of our equity compensation.
All the factors discussed in this section could affect our stock price. The timing of announcements in the public markets regarding new products, product enhancements or product recalls by us or our competitors, or any other material announcements could affect our stock price. Speculation in the media and analyst communities, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock and market trends unrelated to our stock can cause the price of our stock to change. A significant drop in the price of our stock could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting our business.
Our future success depends partly on the continued contribution of our key executives and technical, sales, marketing, manufacturing and administrative personnel. Part of our compensation package includes stock and/or stock options. To the extent our stock performs poorly, it may adversely affect our ability to retain or attract key employees, potentially resulting in lost institutional knowledge and key talent. Changes in compensation packages or costs could impact our profitability and/or our ability to attract and retain sufficient qualified personnel.
Intellectual Property and Piracy
Intellectual property (IP) can be defined as a product that has commercial value but is physically intangible, such as music,
books and movies.
Computer software is a form of IP – Microsoft can write code, create the software application, put it on a CD, and distribute it so
that millions of people can use it at the same time, but the CD is not the work; the software itself is.
While IP is intangible (i.e. you can’t physically touch it because it is not a material item), in this modern information age IP carries
as much, if not more, monetary value than material possessions.
As a result, IP and copyright laws have been put into place both to recognise that it not only retains value but to prevent copying
or distribution against the will of the creator.
Software piracy is effectively the unauthorised copying or distribution of copyrighted software – essentially stealing the IP
within the software. It can take the form of hard-disk loading (loading unlicensed copies of software onto multiple computers
without paying for it); simple copies (fake software typically burned onto an unbranded CD or DVD, with no accompanying
documentation or certificates of authenticity to prove that they are genuine); and counterfeits (fake software typically shipped on
an official-looking CD or DVD, in packaging that appears to look original).
Protecting your Assets
As a business owner, genuine licensed software is an asset and investment and should be managed as such. Also as a business
owner, software piracy, even when committed unknowingly by a member of your staff, is your problem.
Aside from the risk of being caught and facing possible criminal and civil legal sanctions, as well as the risk to your business’s
reputation, a business running pirated software on their PCs can fall prey to malware, viruses, security breaches and network
downtime. This is because unlicensed software is often installed by resellers or IT staff using hacked Product Keys that are
generated by key generating tools, or counterfeit CDs that contain serious security vulnerabilities.
Software companies support their finished products and provide updates and fixes for genuine licensed software to help keep
it functioning properly. When the software is not a genuine product, it is usually not eligible to receive manufacturer’s technical
support, virus protection, warranty information, or any other software updates.
By using genuine licensed software, you not only help protect the creators of the software and the software itself, you ultimately
protect the interests of your own business.
However, with so many things on a business owner’s plate to manage from staff to operations, keeping track of software
licensing requirements can be a big challenge.
This is where Software Asset Management (SAM) comes in to play.
How Software Asset Management Can Help
Software Asset Management (SAM) is a best practice incorporating a set of proven processes and procedures for managing
your business’s IT assets and ensuring they operate at maximum efficiency.
Effective business management means identifying the risks facing your business, and controlling and mitigating those risks
before they can have an impact. Implementing SAM can help you identify what you have, where it’s running, and if your business
is using your assets efficiently.
A SAM program will give you as a business owner a better understanding of what types of licenses and how many your company
has purchased and deployed; what you are actually using and therefore what you need.
You also have added peace of mind by ensuring your software is genuine and not pirated. This provides an extra layer of security
and efficiency that pirated software cannot.
With a good SAM plan in place, you are effectively protecting your business and your staff from the threat of piracy, while
ensuring you get the best bang for your buck from the genuine licensed software you have invested in.