LeapFrog 2011 Annual Report Download - page 123

(for example, if the employee is required to work for a period of time in order to have the right to sell the
stock), the recipient generally will not recognize income until the stock becomes vested, at which time the
recipient will recognize ordinary compensation income equal to the excess, if any, of the fair market value of
the stock on the date it becomes vested over any amount paid by the recipient in exchange for the stock. A
recipient may, however, file an election with the Internal Revenue Service, within 30 days of his or her receipt
of the stock award, to recognize ordinary compensation income, as of the date the recipient receives the
award, equal to the excess, if any, of the fair market value of the stock on the date the award is granted over
any amount paid by the recipient in exchange for the stock.
The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares
acquired from stock awards will be the amount paid for such shares plus any ordinary income recognized
either when the stock is received or when the stock becomes vested.
Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Tax Code and the
satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable
ordinary income realized by the recipient of the stock award.
Restricted Stock Units
Generally, no taxable income is recognized upon receipt of a restricted stock unit award. The participant
will recognize ordinary income in the year in which the shares subject to that unit are actually issued to the
participant in an amount equal to the fair market value of the shares on the date of issuance. Generally, we
will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the
participant at the time the shares are issued.
Stock Appreciation Rights
Generally, stock appreciation rights are subject to similar tax rules as nonstatutory stock options. This
means that, generally, no taxable income is realized upon the receipt of a stock appreciation right. Upon
exercise of the stock appreciation right, the fair market value of the shares (or cash in lieu of shares) received,
less any strike price paid for such shares, is recognized as ordinary income to the participant in the year of
such exercise. Generally, with respect to employees, we are required to withhold from the payment made on
exercise of the stock appreciation right or from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. We will generally be entitled to an income tax deduction equal to
the amount of ordinary income recognized by the participant.
Section 162(m)
Section 162(m) of the Tax Code requires, among other things, that the maximum number of shares
awarded to an individual under a stock awards, or the maximum value of any cash award, must be approved
by stockholders in order for the awards granted under the plan to be eligible for treatment as performance-
based compensation that will not be subject to the $1 million limitation on tax deductibility for compensation
paid to certain specified senior executives. Accordingly, the 2011 EIP limits awards granted under the plan to
an individual participant in any calendar year to: (1) No more than 3.5 million shares subject to stock options
or SARs (or other stock awards whose value is determined by reference to an increase over an exercise or
strike price) to an individual participant; (2) No more than 3.5 million shares subject to performance-based
restricted stock or RSU awards to an individual participant; and (3) No more than $1 million subject to
performance cash awards to an individual participant. These limits are greater than the number of shares or
cash subject to any particular award that we have granted to any individual in the past.
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