E MPLOYMENT A GREEMENT
This E MPLOYMENT A GREEMENT (“ Agreement ”), is entered into between L EAPFROG E NTERPRISES , I NC . , a Delaware corporation (the “ Company ”), and J OHN B ARBOUR (“ Executive ”) and shall be deemed effective as of March 7, 2011 (the “ Effective Date ”). The Company and Executive are each separately referred to as a “ Party ” and collectively as the “ Parties .”
WHEREAS , the Company deems Executive’s employment services as contemplated by this Agreement to be material and significant to the Company’s success and desires to ensure that the skills and experience of Executive be made available to the Company; and
WHEREAS , the Parties desire to enter into this Agreement providing for the employment of Executive by the Company on the terms and conditions hereinafter set forth.
NOW, THEREFORE , in consideration of the mutual promises and subject to the terms and conditions set forth herein, the Parties agree as follows:
Section 1. EMPLOYMENT.
1.1 Position, Duties, Responsibilities, Authority. The Company shall employ Executive as its Chief Executive Officer, with all such duties, responsibilities and authority as are commensurate with such position and assigned to him from time to time by the Board of Directors of the Company (the “ Board ”). Executive shall report to the Board. All departments of the Company shall report to Executive, either directly or indirectly, through senior managers designated by Executive. Executive shall be authorized to hire all employees who will report to him directly, subject to approval by the Compensation Committee of the Board of all proposed compensation terms for such employees. Executive shall have authority to sign and approve matters on behalf of the Company consistent with such authority granted to him by the Board. Executive’s primary office location shall be at the Company’s corporate headquarters in Emeryville, California, but the Company reserves the right to reasonably require Executive to perform his duties at places other than its corporate headquarters from time to time and to require reasonable business travel.
1.2 Policies and Procedures. The employment relationship between the Parties shall be governed by the general employment policies of the Company, including those relating to protection of confidential information and assignment of inventions, except that when the terms of this Agreement differ from or are in conflict with the Company’s general employment policies or practices, this Agreement shall control.
1.3 Exclusive Employment. Executive shall devote all of his business time and attention to his duties and responsibilities to the Company. During his employment,
Executive shall not, without the Board’s prior written approval, render any business, professional or commercial services of any kind to any other person, firm or corporation, whether for compensation or otherwise, except that Executive may engage in civic, philanthropic and community service activities so long as such activities do not interfere with Executive’s ability to comply with his obligations under this Agreement and do not otherwise conflict with the policies or interest of the Company, as determined by the Board in its reasonable discretion. Notwithstanding the provisions of this Section 1.3, Executive may serve on the board of directors of one company of his choice, provided that the Board, in its sole discretion, first shall have determined that such service will not interfere with Executive’s ability to comply with his obligations under this Agreement or otherwise conflict with the policies or interest of the Company.
1.4 Board of Directors. Executive acknowledges that he will be appointed to the Board to serve as a director of the Company. Executive agrees that if his employment with the Company is terminated for any reason, either voluntarily or involuntarily, with or without cause, he shall resign his position as a member of the Board simultaneously with the termination of his employment, unless the Board shall otherwise determine. So long as Executive serves as an employee of the Company, Executive will receive no compensation for service as a director.
Section 2. COMPENSATION AND OTHER EXECUTIVE BENEFITS.
In consideration of Executive’s employment, and except as otherwise provided herein, Executive shall receive from the Company the compensation and benefits described in this Section 2. Executive authorizes the Company to deduct and withhold from all compensation to be paid to him any and all sums required to be deducted or withheld pursuant to federal, state, or local law, regulation, ruling, or ordinance, including, but not limited to, income tax withholding and payroll taxes.
2.1 Base Compensation and Bonus.
2.1.1 Base Salary. The Company shall pay Executive for his services hereunder a base salary at the rate of $575,000 per year, subject to required withholdings and deductions, paid on the payroll schedule for the Company’s senior executives in effect from time to time. Executive’s base salary shall be subject to annual review by the Board and may be increased, but not decreased, from time to time by the Board. The base salary as determined herein from time to time shall constitute Executive’s “ Base Salary ” for purposes of this Agreement.
2.1.2 Annual Bonus. Executive shall be eligible to receive an annual bonus (the “ Bonus ”) based on Executive’s achievement of certain performance objectives established for him, with Executive’s advice and consultation, by the Board or the Compensation Committee of the Board, as applicable, (the “ Objectives ”), as well as the Company’s overall business and financial performance. Executive’s target-level Bonus will be set at one hundred percent (100%) of his Base Salary (the “ Target Bonus ”), assuming established target-level Objectives for the Bonus year are achieved in all material respects. Executive shall also have an opportunity to receive an additional bonus for exemplary performance pursuant to stretch-level
objectives, such additional bonus opportunity and stretch-level objectives to be determined by the Board in its discretion, after consultation with Executive. Executive must remain employed by the Company through and including the last day of each Bonus year in order to be eligible to receive a Bonus for that year, and no prorated Bonus can be earned other than as set forth below in this Section 2.1.2 or in Section 4. The Board (or Compensation Committee), in its sole discretion, will determine whether Executive has earned a Bonus, and the amount of any such Bonus in accordance with the Objectives. The Bonus shall be payable within ten (10) business days after the date the Bonus has been determined, but no later than ninety (90) days following the last day of the Bonus year. Notwithstanding the foregoing, Executive’s Bonus for 2011 shall be a guaranteed Target Bonus, which shall be prorated based on the portion of calendar year 2011 during which Executive is employed by the Company and shall be paid in monthly installments during 2011; provided, however, that if Executive does not remain employed by the Company through the end of 2011, he shall be obligated to repay to the Company the full amount of all installment payments previously received unless such termination of employment is described in Section 4.3, 4.5 or 4.6 below.
2.2 Vacation. Executive shall be entitled to accrue twenty (20) days of paid vacation each calendar year, accrued on a monthly basis in accordance with Company vacation and leave policies in effect from time to time, up to a maximum accrual of thirty-five (35) days of paid vacation. Executive shall plan and take vacation consistent with his duties and obligations hereunder.
2.3.1 General Benefits. Executive shall be entitled to receive all welfare, retirement and fringe benefits (including group medical and dental coverage for Executive, his spouse and dependent children, life and disability insurance coverage, and paid sick leave) and perquisites (collectively, the “ Executive Benefit Plans ”) that are made available to the Company’s senior executives generally, in accordance with all terms and conditions governing such benefits in effect from time to time. The life insurance coverage provided to Executive shall provide a death benefit of no less than $2 million, or such lesser amount as may be obtained for an annual premium that does not exceed $5,000.
2.3.2 Business Travel/Expenses. Executive shall be required to travel in the performance of his duties hereunder, and the Company shall reimburse Executive for all reasonable documented business expenses incurred by Executive in connection with his services hereunder, upon submission to the Company, in accordance with Company policy, of a written accounting of such expenses, which accounting shall include an itemized list of all expenses incurred, the business purposes for which such expenses were incurred, and all such receipts as Executive reasonably has been able to obtain.
2.3.3 Initial Travel and Temporary Housing Expenses. The Company shall pay Executive $150,000, payable in quarterly installments beginning on the first payroll date following the Effective Date to provide assistance for travel and temporary housing (the “ Travel/Housing Subsidy ”). The Travel/Housing Subsidy shall be subject to applicable tax withholding. In addition, for the first sixty (60) days following the Effective Date, Executive
shall be entitled to reimbursement for reasonable hotel expenses, and such reimbursements shall be in addition to the Travel/Housing Subsidy.
2.3.4 Relocation Benefits. In addition to the Travel/Housing Subsidy, Executive shall be entitled to a relocation package that includes the following:
22.214.171.124 Travel: The Company will reimburse Executive for the reasonable hotel expenses, coach airfare from New York, New York, meals and transportation incurred by his wife for purposes of making three (3) house-hunting trips to the San Francisco Bay Area.
126.96.36.199 Shipment of Goods: Executive’s household goods in Rye, New York plus three cars will be packed, loaded and transported to the San Francisco Bay Area via the Company’s standard carrier. Executive will also be provided with up to ninety (90) days of storage of the shipped goods, if needed. The Company will be billed directly for the foregoing services.
188.8.131.52 Closing Costs: If Executive sells his home in Rye, New York within two (2) years following the Effective Date, the Company will pay standard closing costs on the sale of such home, including any real estate transfer taxes, title fees and customary real estate broker commissions. The Company will also pay the standard closing costs, including any real estate transfer taxes, title fees, customary real estate broker commissions and up to two (2) mortgage rate discount points, on the purchase of a residence (apartment or house) in the San Francisco Bay Area. The amount paid by the Company under this Section 184.108.40.206 shall not exceed $150,000.
220.127.116.11 Tax Gross Up: To the extent that any Company reimbursement of or payment for the relocation benefits described in Sections 18.104.22.168 and 22.214.171.124 above is taxable to Executive, the Company shall pay to him an additional amount that is intended to offset such taxes, which amount shall be equal to forty-five percent (45%) of such reimbursement or payment.
126.96.36.199 Mortgage Interest Differential: Upon the sale of Executive’s residence in Rye, New York and his purchase of a primary residence in the Bay Area within two (2) years following the Effective Date, the Company shall pay to Executive a monthly reimbursement equal to the Mortgage Interest Payments (as hereinafter defined) until the Company’s obligation to make such payments terminates as provided below. As used herein, the term “Mortgage Interest Payments” shall mean the lower of: (a) the amount of Executive’s monthly interest portion of the Stipulated Mortgage Amount after offsetting the value of any tax deduction that Executive would receive for such interest payments, and (b) the amount resulting from the calculation in clause (a) above, assuming that Executive’s mortgage interest rate is 4.25% per annum. The Mortgage Interest Payments shall continue until and then terminate on the earliest to occur of (A) the termination of Executive’s employment with the Company, (B) Executive ceasing to make payments on a mortgage on his primary residence in the San Francisco Bay Area, and (C) the second anniversary of the date of Executive’s purchase of a residence in the San Francisco Bay Area. If Executive refinances or sells one San Francisco Bay Area residence and purchase another in the San Francisco Bay Area, the amount of the Mortgage
Interest Payments shall not be recalculated and shall continue unaffected by such transaction. Executive will also receive an amount that is intended to offset his tax on any reimbursement of Mortgage Interest Payments pursuant to this Section 188.8.131.52, which amount shall be equal to forty-five percent (45%) of such reimbursement of Mortgage Interest Payments. Notwithstanding the foregoing, the Company’s reimbursement of Mortgage Interest Payments, including any related tax gross-up payments, under this Section 184.108.40.206 shall not exceed $20,000 per year.
As used herein, the following terms shall have the following meanings: “Stipulated Mortgage Amount” shall mean a mortgage principal amount equal to the lesser of: (a) difference between the Purchase Price and the Net Sales Proceeds and (b) $750,000. “Purchase Price” shall mean the purchase price of Executive’s San Francisco Bay Area residence and “Net Sales Proceeds” shall mean the net sales proceeds from the sale of Executive’s primary residence in Rye, New York.
If Executive receives any of the relocation benefits set forth in this Section 2.3.4, including tax gross-up amounts, and resigns without Good Reason prior to the second anniversary of the Effective Date, he will be required to reimburse the Company for all such prior reimbursements on a pro rata basis determined by multiplying the amount of such prior reimbursements by a fraction, the numerator of which is twenty-four (24) minus the number of months worked prior to Executive’s resignation and the denominator of which is twenty-four (24).
2.4 Attorneys’ Fee Reimbursement. The Company shall reimburse Executive for all legal fees actually and reasonably incurred by him in connection with the negotiation, review and finalization of this Agreement, up to a maximum total reimbursement amount of $10,000.
Section 3. EQUITY COMPENSATION.
3.1 Equity Compensation. Not later than the later of (a) the Effective Date and (b) five (5) business days after the public announcement of Executive’s employment pursuant to the terms of this Agreement, the Company shall grant Executive an award of a nonstatutory stock option with a ten (10) year term to purchase 850,000 shares of the Company’s Class A Common Stock (“ Company Common Stock ”) pursuant to the LeapFrog Enterprises, Inc. 2002 Equity Incentive Plan as in effect on the Effective Date (the “ Plan ”). Such option (the “ Option ”) shall have an exercise price equal to the fair market value of Company Common Stock as determined by the Board or the Compensation Committee of the Board, as applicable, on the date of grant and shall vest over a period of four (4) years, with one fourth (1/4) of the shares subject to the Option vesting upon Executive’s completion of one (1) year of continuous employment service following the Effective Date and one forty-eighth (1/48) of the shares subject to the Option vesting for each month of Executive’s continuous employment service thereafter. Effective on April 15, 2011, the Company also shall grant Executive an award of a restricted stock unit (the “ Restricted Stock Unit ”) by which he would receive 150,000 shares of Company Common Stock pursuant to the Plan. One fourth (1/4) of the shares of Company Common Stock subject to the Restricted Stock Unit shall vest and be delivered to Executive upon his completion of one (1) year of continuous employment service following the Effective Date, and one forty-eighth (1/48) of the shares of Company Common Stock subject to the Restricted Stock Unit shall vest and be delivered to Executive upon his
completion of each month of continuous employment service thereafter. The Option and the Restricted Stock Unit shall be subject to all terms and conditions set forth in the Plan and in a stock option grant notice, stock option agreement, restricted stock unit grant notice and restricted stock unit agreement under the Plan.
3.2 Other Equity Awards. In addition to the Option and the Restricted Stock Unit, the Company may in the future award Executive additional stock options or other equity awards (collectively, the “ Equity Awards ”) pursuant to the Plan as determined by the Compensation Committee of the Board, in its sole discretion. Except as expressly provided herein, the exercisability, vesting and other terms and conditions governing the Equity Awards shall be governed solely by the separate written agreements governing such Equity Awards, and not by this Agreement.
Section 4. AT WILL EMPLOYMENT; POST-EMPLOYMENT BENEFITS.
4.1 At Will Employment. Executive’s employment with the Company shall be at-will. Accordingly, both Executive and the Company shall remain free to terminate the employment relationship with or without Cause or Good Reason, at any time, with or without advance notice, subject to the terms of this Agreement.
4.2 Payments Due Upon Termination For Any Reason. Upon termination of Executive’s employment for any reason by any Party, Executive (or his estate, if applicable) shall be paid any earned but unpaid Base Salary due to him, all accrued but unused vacation earned through and including the date Executive’s employment terminates (the “ Termination Date ”), any earned but unpaid prior year bonus and all accrued and vested benefits under all Executive Benefit Plans. Executive (or his estate, if applicable) shall be reimbursed for all reasonable documented business expenses incurred by Executive in accordance with the terms of this Agreement and the Company’s expense reimbursement policies and procedures then in effect. All payments under this Section 4.2 shall be in addition to any severance benefits to which Executive may become entitled pursuant to the terms of this Agreement.
4.3 Termination For Death/Permanent Disability. Executive’s employment shall automatically terminate upon Executive’s death or “ Permanent Disability .” For purposes of this Agreement, Executive shall be deemed to have a Permanent Disability warranting termination of employment if Executive becomes entitled to disability benefits under the Company’s long-term disability insurance plan or policy then in effect; provided, however , that if there is no such plan or policy in effect, the term shall have the same meaning as is set forth in Section 22(e)(3) of the Code. Upon termination of Executive’s employment pursuant to this Section 4.3, Executive (or his estate, if applicable) (i) shall receive any amounts payable to Executive (or his estate, if applicable) under any life or disability insurance policies obtained for Executive pursuant to Section 2.3.1 above and (ii) with the exception of the Bonus for 2011, shall be eligible to receive a prorated portion (based on completed days of employment during the relevant year) of the Bonus for the year of such termination, as determined in accordance with Section 2.1.2 (including, without limitation, the application of the performance objectives that have been established for such year), which shall be paid on the customary Bonus payment date. In addition, Executive (i) shall be credited with one (1) year of additional employment service toward vesting of the Option and the Restricted Stock
Unit and (ii) shall have (or, if applicable, his estate shall have) one (1) year following the termination of his employment to exercise the Option and other Equity Awards that are options, to the extent vested, but not beyond their original terms.
4.4 Termination For Cause.
4.4.1 Cause Defined. The Company may terminate Executive’s employment for “ Cause ” upon ten (10) business days’ advance written notice to Executive, which notice shall specify the facts constituting Cause. For purposes of this Agreement, “ Cause ” for termination shall exist if Executive: (i) commits a willful act of fraud, embezzlement or misappropriation against or involving the Company; (ii) is convicted of, or enters a plea of guilty or no contest to, any felony involving moral turpitude or dishonesty; (iii) commits an act, or fails to commit an act, involving the Company which amounts to, or with the passage of time would amount to, willful misconduct, wanton misconduct, gross negligence or a material breach of this Agreement and which results or is reasonably likely to result in significant harm to the Company; or (iv) willfully fails to perform his responsibilities and duties under this Agreement for a period of ten (10) business days following receipt of written notice from the Company specifically describing past instances of willful failure of performance and providing Executive an opportunity to cure any such claimed past failure of performance, if it is reasonably susceptible to cure. No act or failure to act on Executive’s part shall be considered “willful” if Executive acted (or failed to act) in good faith, based on a reasonable belief that Executive’s act or omission was in (and not opposed to) the best interests of the Company.
4.4.2 No Benefits Upon Termination For Cause. Executive shall not be entitled to any severance or other post-employment benefits from the Company upon termination of his employment for Cause, except as may be provided by contract or required by law. Executive shall forfeit the Option, the Restricted Stock Unit and all other Equity Awards, to the extent unvested as of the Termination Date for Executive’s employment termination for Cause, and Executive shall have thirty (30) days after such Termination Date (but not beyond the end of their applicable terms) to exercise any vested shares subject to the Options or any other options.
4.5 Termination Without Cause. Upon termination of Executive’s employment without Cause and Executive’s satisfaction of the release requirements set forth in Section 4.9 below and continuing satisfaction of the covenants set forth in Section 9 below, the Company shall provide Executive cash severance benefits, payable in eighteen (18) monthly installments, equal to the following: (i) eighteen (18) months of Base Salary, at the rate in effect during the last regularly scheduled payment period immediately preceding the Termination Date; and (ii) a payment equal to one and one-half (1 1 / 2 ) times Executive’s Target Bonus for the calendar year in which such termination occurs. The foregoing cash severance benefits are hereinafter referred to as the “Severance Benefits .” In addition, Executive (i) with the exception of the Bonus for 2011 shall be eligible to receive a prorated portion (based on completed days of employment during the relevant year) of the Bonus for the year of such termination, as determined in accordance with Section 2.1.2 (including, without limitation, the application of the performance objectives that have been established for such year), which shall be paid on the customary Bonus payment date; (ii) shall be credited with one (1) year of additional employment service toward vesting of the Option and the Restricted Stock Unit; (iii)
shall have one (1) year following the termination of his employment to exercise the Option and other Equity Awards that are options, to the extent vested, but not beyond their original terms; and (iv) shall be entitled to receive the health benefit subsidy pursuant to Section 4.7 below.
4.6 Resignation for Good Reason.
4.6.1 Good Reason Defined. For purposes of this Agreement, a resignation from employment for “ Good Reason ” means a voluntary termination by Executive within one hundred (100) days after the occurrence of one of the following events without his express written consent: (i) a material diminution in Executive’s authority, duties or responsibilities (subject to the clarification in the immediately following sentence); (ii) Executive is required to report to an officer or other employee of the Company rather than to the Board (subject to the clarification in the immediately following sentence); (iii) a material reduction in Executive’s Base Salary; (iv) a change in the geographic location of Executive’s workplace that either is more than fifty (50) miles from its previous location or, if Executive should purchase a primary residence in the San Francisco Bay Area, increases his one-way commute from such primary residence by more than thirty (30) miles; (v) the expiration of Executive’s term as a member of the Board without his re-election (x) at a time when more than fifty percent (50%) of the voting power for election of members of the Board is held by an individual, a group or another company (a “Controlled Company”) or (y) at a time when the Company is not such a Controlled Company and has failed to nominate him for re-election; or (vi) a material breach by the Company, or its successor, of this Agreement (including the failure of a successor to assume the obligations of this Agreement).
For the avoidance of doubt, any Change in Control, immediately following which Executive does not hold the senior-most position in his functional area in the surviving top-most parent company (disregarding for these purposes any company that is an investment fund or other non-operating company), whether public or private, and does not report directly to the chief executive officer of such top-most parent company (or to the board of directors of such top-most parent company if Executive is the chief executive officer of the Company immediately prior to the Change in Control) shall be regarded as a material diminution in Executive’s authority, duties or responsibilities for purposes of this definition, provided that Executive, as a condition of resigning for Good Reason on such basis, shall first have remained in employment with the Company, or its successor, on a full time basis (or on a less than full time basis, as the Company or its successor shall determine), with a Base Salary, Target Bonus, vesting in Equity Awards and aggregate level of benefits that are no less than they were immediately prior to the Change in Control (unadjusted for employment on a less than full time basis), for a period of six (6) months (or such shorter period as the Company or its successor shall determine) in order to provide transition support to the Company or its successor.
Prior to any resignation for Good Reason, Executive must provide written notice to the Company of the existence of the Good Reason event within forty-five (45) days following its initial existence, and the Company shall have a period of forty-five (45) days following such notice within which to cure the event. If the event is cured within such time period, Executive shall not be entitled to resign from his employment for Good Reason.